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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (Fee Required)
FOR THE FISCAL YEAR ENDED FEBRUARY 1, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 0-19994
SOLO SERVE CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 74 - 2048057
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
1610 Cornerway Blvd., San Antonio, Texas 78219
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(Address of Principal Executive Offices)
(210) 662-6262
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(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, par value $.01 per share
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock (which consists of
shares of Common Stock and Preferred Stock) held by non-affiliates of the
registrant as of April 30, 1997 cannot be determined because there is not an
active trading market for the Company's stock. See Item 5 of this Report.
The number of shares of the issuer's Common Stock, par value $.01 per
share, and Preferred Stock, par value $.01 per share, outstanding as of April
30, 1997, were 2,856,126 and 1,388,889 shares, respectively. Affiliates of the
registrant held 1,307,500 shares of the Common Stock, and all of the Preferred
Stock, outstanding on April 30, 1997.
Exhibit Index on Page 57
Total Pages 95
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FORM 10-K
TABLE OF CONTENTS
PART I
<TABLE>
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Page
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<S> <C> <C>
Item 1. Business ...................................................... 3
Item 2. Properties .................................................... 9
Item 3. Legal Proceedings ............................................. 9
Item 4. Submission of Matters to a Vote of Security Holders ........... 10
Item 4a. Executive Officers of the Company ............................. 10
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters ..................................................... 10
Item 6. Selected Financial Data ....................................... 11
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations ................................... 12
Item 8. Financial Statements .......................................... 19
Item 9. Changes in and Disagreement with Accountants on Accounting
and Financial Disclosure .................................... 19
PART III
Item 10. Directors and Executive Officers .............................. 20
Item 11. Executive Compensation ........................................ 21
Item 12. Security Ownership of Certain Beneficial Owners and
Management .................................................. 31
Item 13. Certain Relationships and Related Transactions ................ 32
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K .................................................... 35
Index to Consolidated Financial Statements and Schedules ............... F-1
</TABLE>
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PART I
ITEM 1. BUSINESS
GENERAL
The Company operates a chain of off-price retail stores offering a
wide selection of name-brand and other merchandise at prices significantly
below those of traditional department and specialty stores. Solo Serve stores
offer a wide variety of fashion apparel for the entire family, as well as
fragrances, hosiery, shoes and quality home furnishings. The Company currently
operates 28 Solo Serve stores in Texas, Louisiana, and Alabama.
The Company was formed in Texas in 1979 to acquire all of the assets
of Solo Serve Company and was reincorporated in Delaware in December 1991.
Prior to February 9, 1996, Solo Serve Corporation common stock was quoted on
the NASDAQ National Market System under the symbol "SOLOQ". The Company was
notified by NASDAQ that the Company's common stock would no longer be eligible
for trading on the NASDAQ Stock Market effective February 9, 1996 because the
Company's request for an exception from the quantitative maintenance criteria
required for inclusion in the NASDAQ National Market System had been denied.
Following delisting from NASDAQ/NMS, the Company's common stock began trading
on the over-the-counter market and the quotes are carried in the "pink sheets."
There are few trades in the Company's common stock.
On July 21, 1994 (the "Petition Date"), the Company filed a petition
(the "Filing") under Chapter 11 of the Bankruptcy Code ("Chapter 11") in the
United States Bankruptcy Court for the Western District of Texas (the
"Bankruptcy Court"). On July 6, 1995, the Bankruptcy Court approved a Proposed
Plan of Reorganization (the "Plan") jointly sponsored by the Official Committee
of Unsecured Creditors and Texas Commerce Bank San Antonio, N.A. ("TCB"), which
became effective on July 18, 1995. Under the Plan, the Unsecured Creditors
agreed to a distribution of 72.5% of pre- petition unsecured allowed claims.
The total amount of pre-petition unsecured allowed claims was $15.6 million.
Additionally, the Plan allowed for cash distributions for certain secured and
priority claims which totaled $2.2 million. On the effective date of the Plan,
the Company issued 1,388,889 shares of convertible Preferred Stock for an
aggregate consideration of $2.5 million. All of the Preferred Stock was
purchased by General Atlantic Corporation ("GAC"), the Company's largest
stockholder. On July 31, 1995, the Company disbursed $10.2 million to its
creditors in accordance with the First Distribution as proposed by the Plan.
The second and final distribution, which occurred on December 20, 1995, was
approximately $3.5 million. The second distribution was financed in part by
$2.5 million of funds in escrow which were the proceeds from the sale of the
Company's Preferred Stock. As of February 3, 1996, the Company had "Contested
Claims" of approximately $461,000 which were classified as Liabilities Subject
to Compromise. On April 17, 1996, the Bankruptcy Court entered the Final
Decree, which administratively closed Solo Serve's Chapter 11 bankruptcy case.
As of February 1, 1997 the Company has settled all known claims.
Pursuant to the Plan, the Company's existing common stock was subject
to a one-for-two reverse split. The Preferred Stock issued in connection with
the Plan has a liquidation value of $1.80 per share, is convertible to an equal
number of common shares, has voting rights on an as converted basis, and pays
no preferential dividends. With the issuance of Preferred Stock mentioned
above, GAC has increased its percentage ownership of the voting shares of the
Company to approximately 62% from its pre-reorganization interest of
approximately 44%.
The settlement of the Company's pre-petition liabilities reduced the
Company's net operating loss carryforwards and other tax credit carryforwards
by approximately $4.2 million. The above mentioned equity infusion by GAC has
not caused an ownership change that would limit the future utilization of the
Company's remaining net operating loss carryforwards and other tax credit
carryforwards. However, future ownership changes could result in such
limitations.
In an effort to improve the Company's financial performance and in
connection with the Company's bankruptcy reorganization, the Company reduced
the number of stores, implemented expense reductions commensurate with the
downsizing of the total stores in operation, and improved liquidity by
restructuring its pre-petition debt and obtaining a new credit facility. Since
the effective date of the Plan, the Company has continued to experience lower
than anticipated sales and continuing operating losses. The Company's business
has been affected by a number of factors, including increased competition in
its principal markets, weakness in the apparel industry, unfavorable economic
conditions in
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certain markets and other factors, many of which are not within the Company's
control. The Company continues to experience increased competitive pressure on
both price points and market share. Increased competitive pricing and
promotional strategies have put significant downward pressure on price points,
and competitors have opened additional store locations in the Company's
principal markets. While the Company has maintained inventory at planned
levels, the Company has experienced some reduction in the availability of trade
credit, and continuing unfavorable business conditions and financial
performance could heighten vendor and factor concern regarding the Company's
creditworthiness, which could adversely affect the Company's ability to receive
sufficient trade credit support to acquire adequate levels of inventory in the
future. No assurance can be given that the Company will be successful in its
efforts to improve sales and operations and reverse operating trends. Because
of these uncertainties, any investment in the Company's common stock should be
considered speculative.
THE SOLO SERVE STORE
The Solo Serve stores are designed to create a departmentalized
atmosphere through merchandise presentation and abundant in-store signage. The
Company seeks to create an attractive, comfortable shopping environment that
draws customers' attention to the broad assortment of value-priced branded
merchandise.
Merchandise departments are well-signed, easily distinguished and
typically configured around a "racetrack" aisle designed to optimize the
customer's visual impressions of the quality and quantity of the store's
merchandise. Departments are carpeted and display fixtures along with capacity
racks are used to highlight the store's broad merchandise assortment. In-store
signage highlights famous designers' and manufacturers' names and reinforces
the Company's value pricing. The store entrances are designed to create a
brand, price, fashion and service statement to the customer by featuring
fragrance showcases, prominent branded men's and women's apparel and a customer
service desk.
The Solo Serve stores are located generally in metropolitan areas in
large strip shopping centers. The Solo Serve stores typically vary in size from
25,000 to 30,000 total square feet, with an average of approximately 23,000
square feet of selling space and a 3,000-square-foot storage facility.
MERCHANDISING STRATEGY
The Company primarily purchases a large selection of
nationally-recognized branded merchandise for its Solo Serve stores, which the
Company prices significantly below traditional department and specialty stores.
The Company seeks to manage the inventory in its Solo Serve stores to achieve a
high turnover rate and to provide the stores with fresh merchandise on a
frequent basis. Discount prices and high inventory turnover are made possible
by an opportunistic purchasing strategy which consists primarily of branded
goods purchased at incentive prices, of in-season cancellations by major
retailers, manufacturers' overruns, end-of-season closeouts, occasional
acquisitions of end-of- season inventory from well-known and upscale retail
companies, and an efficient distribution system permitting quick delivery of
new merchandise to the stores. First quality name-brand merchandise remains the
primary focus of the Solo Serve store's product offering, but purchases of
selected irregulars, which are subject to strict quality control, permit the
Company to reinforce Solo Serve's "price-value" message. Through frequent
promotions and a changing variety of quality, off-price merchandise in the
stores, the Company seeks to frequently attract the knowledgeable, value-
conscious customer.
The broadest merchandise selection in Solo Serve stores is in women's
fashions. Women's merchandise lines include dresses, separates, coordinates,
activewear, and outerwear. Women's apparel is segmented into juniors, misses,
petites and plus sizes. Handbags, sleepwear and loungewear, intimate apparel
and casual and dress shoes complement the women's apparel group.
Another important department in Solo Serve stores is the men's
department. Men's apparel includes branded dress shirts and ties, basics,
casual sportswear, activewear, dress slacks, jeans, and outerwear.
The children's department is designed to offer exceptional values for
families with young children. Children's merchandise lines include a wide
selection of infants' and toddlers' apparel and basics; girls' sportswear,
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dresses, lingerie, sleepwear, activewear, basics and outerwear in sizes 4 to 6x
and 7 to 14; and boys' tops, bottoms, jeans, activewear, basics and outerwear
in sizes 4 to 7 and 8 to 20.
Additionally, the Company is expanding its product offering of
domestics, home decor and gifts.
Solo Serve stores also offer an extensive and in-depth selection of
prestige fragrances in a department store format under an exclusive supply
agreement with a major fragrance supplier, Model Imperial, Inc. The Company
operates a licensed department in its stores and sells Model's fragrances on a
consignment basis. Under the terms of the agreement, the Company supplies
fixtures, staffing, and advertising at specified levels and receives a
commission on actual sales. Although the Company retains some discretion over
merchandise mix, Model is primarily responsible for the ultimate selection and
pricing of fragrances. Model filed for protection from its creditors under
Chapter 11 of the U.S. Bankruptcy Code on July 18, 1996. Although Model has not
yet accepted or rejected the exclusive supply agreement with the Company during
the pendency of the Chapter 11 case, Model has indicated its desire to continue
the contract with the Company. Model is seeking modifications of the percentage
commission paid to the Company. The Company has not yet determined whether a
continued relationship with Model would fulfill the product and business needs
of the Company. A disruption in the Company's supply of fragrances could
adversely affect sales during key selling seasons. If a disruption in the Model
supply should occur, the Company would seek an alternative supplier of
fragrances on a similar consignment basis or directly purchase products to
attempt to offset any loss of sales and gross margin. Any direct purchase of
inventory would increase working capital requirements and may have an adverse
effect on liquidity.
The Company has granted a license to an independent licensee to
operate fine jewelry departments in the San Antonio Solo Serve stores. Under
the license agreement, which expires August 31, 1999, the licensee has agreed
to pay to the Company a base rental amount and a percentage of its sales in
excess of specified amounts. These jewelry departments typically occupy 200
square feet of selling space in each of the 12 San Antonio stores.
During fiscal 1997, management plans to, among other things, place
special emphasis on merchandising and marketing specifically to the
econo-socio-ethnic background of the trade area and customer base of individual
stores. This is expected to include, but not be limited to, market-specific or
store-specific tailoring of the product offerings, including price points,
sizing, brands, assortments, categories, and promotions. Additionally, greater
emphasis will be placed on planning of stock levels and allocating of product
by category and price points to meet the needs of the individual store and its
customer base. It is possible that certain categories of inventory will be
eliminated entirely in certain stores and other categories will be added or
existing categories expanded. Management believes that these efforts and a
reduction in turnaround time in its distribution center will increase sales,
reduce overall inventory levels and enhance cash flow.
Management also plans to open a new store in the third quarter of
fiscal 1997 in a new market area smaller than the market areas served by the
Company's existing stores.. This will be a test of the Company's ability to
operate a smaller store in a smaller market than it has historically, and to
design a store to match a specific market. The store will be in a market with
less direct competition from other, larger off-price retailers. The Company
anticipates that with its new merchandising strategy, such a store can be
successful and contribute to improving the Company's operating results.
PRICING STRATEGY
The Company's pricing strategy is designed to provide exceptional
value to its customers. Solo Serve stores offer merchandise at prices
significantly below those charged by traditional department and specialty
stores. Most price tickets display the Solo Serve selling price as well as the
comparable selling price of the item at traditional department or specialty
stores. In addition, the ticket clearly identifies whether the item is first
quality or an irregular. Pricing decisions are made centrally by the Company's
staff of buyers, subject to review by the divisional merchandise managers.
Management periodically monitors its competitors' prices in order to permit
more focused promotional efforts and to ensure that the Company's prices remain
competitive. The Company's management information systems provide ongoing
information enabling the Company's buyers to track sales by unit and category
and adjust current prices when appropriate. During 1996, the Company
implemented selectively
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higher initial markups than in comparable periods in fiscal 1995, which
contributed to higher gross margins on lower gross sales. During 1997,
management plans to reduce promotional pricing activity from historical levels.
The Company's advertised promotions are designed to permit Solo Serve
customers to realize additional savings over the already discounted prices,
encourage customers to visit the stores regularly and reinforce Solo Serve's
image as a dependable source of quality goods at substantial savings. Price
reductions are taken on fashion merchandise to maximize inventory turnover and
offer additional value opportunities to customers. Management periodically
reviews and adjusts its pricing strategies and promotional activities in an
effort to more effectively convey its price/value message and encourage
frequent visits to its stores.
PROMOTIONAL STRATEGY
The Company's advertising and promotional strategy is designed
principally to reinforce Solo Serve's image as a value-priced retailer for the
entire family. Advertising and promotion programs are directed at the general
population through newspaper advertisements, special promotional events,
television and radio and focus on advertising specific merchandise or
categories offered at opportunistic or at discounted prices. The Company
continues to strive to encourage frequent shopping from customers by presenting
the customer with an ever-changing mix of merchandise. Media promotions are
reinforced by in-store signage highlighting famous designers' and
manufacturers' names and by pricing statements comparing Solo Serve's prices to
those of department and specialty stores. In 1997, management expects to shift
more of its advertising expenditures from print to electronic media,
principally television.
The Company maintains an in-house advertising department that
currently produces substantially all of the Company's print advertising and
in-store signage. Computerized graphics technology is used to produce
camera-ready print media, which management believes results in more timely and
cost effective production than would be possible with third-party providers.
VENDOR RELATIONSHIPS AND PURCHASING STRATEGY
To ensure a steady supply of brand-name and other merchandise, the
Company has developed long-standing relationships with certain of its
suppliers. The Company maintains a central buying staff in San Antonio and for
part of fiscal 1996 employed its own staff of full-time resident buyers in New
York. Late in 1996, the Company eliminated its New York buying staff.
Management believes that the San Antonio buyers are best able to understand the
preferences of customers in the Company's markets. These buyers make frequent
trips to New York (where the Company still maintains an office) and Los
Angeles, and are continually in contact with market and buying resources
throughout the country. The Company's buying staff is comprised of experienced
off-price buyers, some of whom also have experience with traditional department
stores. The buying staff is divided into groups supervised by divisional
merchandise managers who report to the Chief Executive Officer.
The Company actively pursues additional branded sources of supply and
is attempting to selectively upgrade its merchandise assortments. During fiscal
year 1996, the Company purchased goods from over 1,500 vendors. By purchasing
closer to and during the selling season and later in the merchandise buying
cycle than department and specialty stores, the Company believes it is able to
take advantage of favorable market conditions. This purchasing strategy enables
the Company to interpret and react to important fashion developments during the
selling season. To help ensure an adequate supply of value-oriented merchandise
at the beginning of a new season, the Company occasionally purchases
out-of-season merchandise ("Packaways") at advantageous prices and warehouses
this merchandise at its San Antonio distribution center. During 1996, as part
of its strategy to reduce inventory levels, the Company significantly reduced
its purchases of Packaways. Management does not believe this has materially
hindered its ability to have adequate product available for sale at favorable
costs. Favorable merchandise costs are also realized by purchasing from vendors
offering in-season cancellations by major retailers, manufacturers' overruns,
end-of-season closeouts, and selected irregulars. While the Company believes
its relationships with its vendors are generally satisfactory, no assurances
can be given that an adequate supply of merchandise at attractive prices will
continually be available for all of the Company's departments or that there
will not be periodic delays or disruptions in the flow of merchandise to the
Company's stores.
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INVENTORY MANAGEMENT AND MERCHANDISE DISTRIBUTION
The Company's current inventory management strategy of reducing
average store inventories as compared to the prior year is designed to achieve
high inventory turnover rates while enabling the Company to provide its stores
with fresh merchandise on a frequent basis and improving gross margin as a
percentage of sales. By closely monitoring sales, current inventory levels and
fashion trends and comparing them with on-order merchandise, the Company seeks
to manage its inventory turnover by making necessary purchasing adjustments.
The Company owns and operates a 440,000 square-foot headquarters
facility and distribution center which is located on a 24-acre parcel of land
in San Antonio, Texas. This facility houses executive offices, central buying,
advertising, management information systems and administrative staff in 40,000
square feet of office space and a 400,000 square-foot receiving, distribution
and warehouse area.
The Company uses a centralized distribution system in which all
merchandise is processed through its distribution center and allocated to the
Company's stores. Merchandise received at the distribution center is checked,
price-ticketed, assigned to individual stores, packed for delivery and shipped.
The Company utilizes its distribution personnel and systems to assign
merchandise to stores based on store volume and known historical customer
purchasing patterns. The distribution system complements the Company's
promotional advertising strategy by prioritizing and processing featured
merchandise through the Company's distribution center on an expedited basis.
The Company uses its distribution facility to take advantage of assorted
merchandise lots at deep discounts, which can be sorted and priced at the
distribution center.
The Company delivers merchandise from its distribution center to the
stores by means of contract carriers or the Company's trucks, typically twice
each week. The distribution center is conveniently located near major
north-south and east-west highways, facilitating efficient distribution to the
Company's stores.
MANAGEMENT INFORMATION SYSTEMS
Management continues to be committed to the use of technology as a
means of raising productivity and improving the overall performance of the
business. Merchandise planning and control systems are the principal focus of
present efforts. Management believes that its current merchandising systems are
adequate. During the fall of 1995, the Company implemented a merchandise
planning system that management believes improved inventory management by
allowing for timely response to business trends, and the management of lower
average store inventories. During 1997, additional capabilities of the system
are expected to be utilized to manage inventory allocation and store inventory
planning by department and category.
During 1997 the Company plans to pilot a new Point of Sale cash
register system at 5 stores. Management expects the new system to speed
customer check-out, improve customer service, and enhance reporting
capabilities. The Company is in the process of reviewing potential system
problems related to the year 2000, the resolutions of which management does not
believe would have a material adverse effect on the Company or its business.
COMPETITION
The national apparel market is highly fragmented and competitive. In
addition to price, the Company believes the principal competitive factors in
the retail apparel industry are merchandise assortment, quality and
presentation, relationships with vendors, store location, operating costs, and
customer service. The Company faces significant competition for customers and
merchandise supply from other off-price apparel stores and discount stores.
Many of these competitors are units of large national or regional chains that
have substantially greater resources than the Company. Among other advantages,
the availability of greater resources permits large national and regional
chains to buy merchandise in larger lots and therefore at better prices; to
leverage their general and administrative expenses over a larger sales base; to
selectively adopt more aggressive pricing or promotional strategies in certain
markets when it is deemed to be advantageous from a competitive standpoint; and
to establish
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and maintain relationships with suppliers who provide access to certain higher
profile branded merchandise. Additionally, as certain larger national and
regional competitors open new stores, they have been able to secure locations
in new retail developments with better tenant mix and demographics than many
Solo Serve stores.
Historically, Solo Serve stores have competed with other off-price
stores by offering a large selection of name-brand merchandise at competitive
prices; with discount stores by offering higher-quality name-brand fashions at
comparable price points; and with traditional department stores by offering
similar name-brands at substantially reduced prices. In recent years larger
off-price chains have significantly expanded their presence in the Company's
historical markets. Moreover, the off-price apparel business has become more
competitive as traditional department stores have adopted more aggressive
pricing and promotional strategies and as discount stores have improved and
enhanced their merchandise selections while continuing to offer discount
prices. Additionally, the growth of fashion-branded outlet malls has somewhat
constricted, and may further constrict, the supply of branded merchandise
formerly available to off-price retailers.
In fiscal year 1996, an overall weakness in retail apparel sales
further stimulated price competition among existing competitors. Additionally,
increased competitive pricing and promotional strategies by major department
stores put tremendous downward pressure on price points during the important
Christmas selling season in 1996. Moreover, in the Company's principal markets,
San Antonio and New Orleans, larger national and regional competitors have
opened additional store locations and more locations are planned. See
"Management's Discussion and Analysis."
EMPLOYEES
During fiscal year 1996, the Company's work force consisted of an
average of approximately 900 forty-hour equivalent employees, referred to by
the Company as "associates". This employee base consisted of approximately 550
full-time associates and an additional 450 part-time associates. Substantial
seasonality is associated with employment levels. The Company expects the
employee base in fiscal 1997 to be approximately the same as 1996.
Management believes that the Company's associates are paid
competitively with current local standards in the industry. The Company
contributes a portion of the cost of medical and life insurance coverage for
those associates who are eligible to participate in Company-sponsored plans.
All associates also receive discounts on purchases of Company merchandise in
the stores. The Company considers its relationship with its associates to be
satisfactory.
Effective February 1996, the Company reentered the Texas Workers'
Compensation insurance program and in January 1997 the Company purchased
fully-funded health and worker's compensation insurance policies. Subsequent to
December 1996, the Company became aware of certain unpaid claims under the
Company's then self-funded worker's compensation and health plans, including a
substantial claim related to a bone marrow transplant for a dependent of one of
the Company's associates. The Company is seeking resolution of this matter
currently. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
CREDIT SALES
The Company offers customers several methods of payment, including
cash, personal checks and third-party credit cards (American Express, Discover,
MasterCard, and Visa). Solo Serve stores also offer a layaway deferred payment
plan. The Company does not have a private label credit card.
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ITEM 2. PROPERTIES
STORE LOCATIONS AND PROPERTIES
The table below shows the location and opening dates of each of the
Company's 28 stores in operation at fiscal year end 1996:
<TABLE>
<CAPTION>
STORE MARKET STORE MARKET
LOCATION OPENING DATE LOCATION OPENING DATE
- ------------ ------------ ------------ ------------
<S> <C> <C> <C>
San Antonio, TX 1919 San Antonio, TX November 1985
San Antonio, TX May 1959 San Antonio, TX April 1988
San Antonio, TX May 1970 San Antonio, TX September 1988
San Antonio, TX February 1981 San Antonio, TX August 1989
San Antonio, TX July 1981 Corpus Christi, TX March 1990
Austin, TX November 1981 San Antonio, TX October 1990
New Orleans, LA July 1983 McAllen, TX September 1992
New Orleans, LA September 1983 Austin, TX October 1990
Baton Rouge, LA October 1983 Laredo, TX July 1991
Mobile, AL September 1984 San Antonio, TX March 1992
New Orleans, LA October 1984 Brownsville, TX August 1992
Corpus Christi, TX March 1985 Shreveport, LA July 1993
New Orleans, LA September 1985 San Antonio, TX March 1994
New Orleans, LA November 1985 Austin, TX March 1994
</TABLE>
In fiscal year 1994, the Company closed its one store located in Waco,
Texas, assigned its leases and sold the furniture and fixtures of its eight
stores in Houston and closed its eight Half & More stores. In fiscal 1995 the
Company closed its one store located in Montgomery, Alabama. In fiscal 1996 the
Company closed one of its Austin stores.
The Company owns the real estate and improvements on which three of
its Solo Serve stores in San Antonio, Texas are located and leases the
remainder of its stores. The leases have remaining terms ranging from 1 to 15
years, with renewal options at higher fixed rates in most cases. Most of the
leases provide for percentage rent over sales breakpoints. The Company
presently leases an office in New York for the use of its buyers when they make
buying trips. The Company also owns its 440,000 square-foot corporate
headquarters and distribution center located in San Antonio, Texas.
During 1996, the Company listed all of its owned properties for sale,
including the distribution center. The Company has entered into an earnest
money contract providing for the sale and leaseback of one of its owned store
locations, which contract is subject to a number of conditions. No assurance
can be given that the transaction will close. The Company continues to consider
alternatives with regard to its remaining owned real estate, including
sale/leaseback or, subject to availability of suitable locations, outright sale
of any of the three properties.
See "Management's Discussion and Analysis -- Liquidity and Capital
Resources."
SERVICE MARKS
"Solo Serve" and "Solo" are service marks that have been registered by
the Company with the U.S. Patent and Trademark Office.
ITEM 3. LEGAL PROCEEDINGS
From time to time, the Company is involved in litigation relating to
claims arising out of its operations in the normal course of business. In the
opinion of management, the outcome of this litigation will not have a material
effect on the Company.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders of the Company
during the fourth quarter of the fiscal year ended February 1, 1997.
ITEM 4A. EXECUTIVE OFFICERS OF THE COMPANY
Charles M. Siegel, age 58, became employed by the Company in August
1996 as President and Chief Executive Officer. He joined the Company as a
full-time consultant and Acting Chief Operating Officer in early July 1996.
Prior to joining the Company, Mr. Siegel was President, Chairman and Chief
Executive Officer of 50-Off Stores, Inc., which in 1988 became the successor
organization to Shoppers World stores, for which Mr. Siegel was a member of the
founding executive group in 1975.
Ross E. Bacon, age 52, became Chief Operating and Financial Officer
and Executive Vice President of the Company in September 1996. He had joined
the Company in July 1996 as Chief Financial Officer. From 1994 to 1996, Mr.
Bacon was a self-employed financial consultant, and from 1993 to 1994, he was
Vice President and Chief Financial Officer of Telecommunications Management,
Inc., the parent company of Discount Cellular Paging, a San Antonio-based
cellular telephone and paging company. Mr. Bacon was Vice President and Chief
Financial Officer of Flowers to Go, Inc. from 1992 until 1993.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The following table sets forth for the periods indicated, on a per
share basis, the range of high and low sales prices for the Company's common
stock as quoted by NASDAQ.
For the Fiscal Year Ended February 3, 1996:
<TABLE>
<CAPTION>
High Low
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<S> <C> <C>
Quarter ended April 29, 1995 $ 1.12 $ .50
Quarter ended July 29, 1995 2.25 .44
Quarter ended October 28, 1995 2.12 1.12
Quarter ended February 3, 1996 1.50 .12
</TABLE>
Prior to February 9, 1996, Solo Serve Corporation common stock was
quoted on the NASDAQ National Market System under the symbol "SOLOQ". The
Company was notified by NASDAQ that the Company's common stock would no longer
be eligible for trading on the NASDAQ Stock Market effective February 9, 1996
because the Company's request for an exception from the quantitative
maintenance criteria required for inclusion in the NASDAQ National Market
System had been denied. Following delisting from NASDAQ/NMS, the Company's
common stock began trading on the over-the-counter market and the quotes are
carried in the "pink sheets." There are few trades in the Company's common
stock. The following table sets forth for the periods indicated, the range of
closing bid prices of the Common Stock of the Company in the over-the-counter
market since February 9, 1996, as reported by the National Quotation Bureau.
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
From February 9, 1996 to May 4, 1996 .125 .125
Quarter ended August 3, 1996 .25 .125
Quarter ended November 2, 1996 .4375 .1875
Quarter ended February 1, 1997 .1875 .09375
</TABLE>
These price quotations reflect inter-dealer prices, without adjustment for
retail mark-ups, mark-downs or commissions and may not necessarily represent
actual transactions. There was no price information available for April 10,
1997 through May 6, 1997; however, the closing bid price on each of April 10,
1997 and May 6, 1997 was .15625.
On April 30, 1997, there were 2,856,126 shares of common stock
outstanding, held by 71 holders of record.
The Company has paid cash dividends on its common stock in prior
years. However, since the Company has been publicly held, the Company has never
declared or paid any cash dividends on the common stock. Furthermore, certain
covenants in various credit agreements of the Company restrict the payment of
dividends on the common stock.
10
<PAGE> 11
ITEM 6. SELECTED FINANCIAL DATA
The following data has been derived from the Company's audited
consolidated financial statements, including those found elsewhere in this
Annual Report on Form 10-K for the year ended February 1, 1997. The selected
financial data below should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
with those audited consolidated financial statements.
<TABLE>
<CAPTION>
Fiscal Year Ended
------------------------------------------------------------------------
Jan. 30, Jan. 29, Jan. 28, Feb. 3, Feb. 1,
1993 1994 1995 1996 1997
--------- --------- --------- --------- --------
(in thousands, except operating and per share data)
<S> <C> <C> <C> <C> <C>
Number of Weeks in Fiscal Year 52 52 52 53 52
INCOME STATEMENT DATA:
Net revenues $ 154,386 $ 169,053 $ 138,925 $ 109,823 $ 95,238
Cost of goods sold (including buying and distribution
excluding depreciation shown below) 104,316 120,293 100,687 83,474 67,485
--------- --------- --------- --------- --------
Gross profit 50,070 48,760 38,238 26,349 27,753
Selling, general and administrative expenses 40,332 50,000 39,013 29,620 28,203
Depreciation and amortization 2,975 4,075 3,748 2,815 2,421
Store closing expenses -- 1,500 -- -- --
Write off of property and equipment -- -- -- -- 525
Non recurring item -- -- -- -- 464
--------- --------- --------- --------- --------
Operating income (loss) 6,763 (6,815) (4,523) (6,086) (3,860)
Interest expense, net 962 1,237 1,090 1,129 1,624
--------- --------- --------- --------- --------
Income (loss) before income taxes, accounting change, 5,801 (8,052) (5,613) (7,215) (5,484)
reorganization items, and extraordinary item
Reorganization items -- -- 6,262 1,787 --
Provision for (benefit from) income taxes 2,154 (3,070) 3,661 (1,418) --
--------- --------- --------- --------- --------
Income (loss) before accounting change and
extraordinary item 3,647 (4,982) (15,536) (7,584) (5,484)
Cumulative effect of change in accounting for
postretirement benefits, net of tax (193) -- -- -- --
Extraordinary item-gain on discharge of debt, net of
tax -- -- -- 2,753 --
--------- --------- --------- --------- --------
Net income (loss) $ 3,454 $ (4,982) $ (15,536) $ (4,831) $ (5,484)
========= ========= ========= ========= ========
Income (loss) per common share before accounting
change and extraordinary item $ 1.34 $ (1.70) $ (5.45) $ (2.10) $ (1.92)
Net income (loss) per common share(1) $ 1.26 $ (1.70) $ (5.45) $ (1.34) $ (1.92)
Dividends declared per common share -- -- -- -- --
Weighted average shares outstanding 2,740 2,919 2,850 3,605 2,856
BALANCE SHEET DATA (AT PERIOD END):
Total assets $ 57,697 $ 57,753 $ 54,692 $ 33,300 $ 26,387
Long-term debt (including capital lease obligations) $ 11,247 $ 17,998 $ 5 $ 15,136 $ 14,961
Liabilities subject to compromise $ -- $ -- $ 33,385 $ 461 $ --
Total stockholders' equity $ 32,493 $ 27,572 $ 12,148 $ 9,817 $ 4,333
OPERATING DATA:
Number of stores in operation at end of period 41 46 30 29 28
Number of stores opened during period 11 8 2 -- --
Number of stores closed during period -- 3 18 1 1
Comparable store net sales increase (decrease)(2) 3.0% (5.9%) (11.2%) (5.6%) (10.6%)
Selling square footage in operation at end of period
(in thousands) 880 996 701 675 657
Gross square footage in operation at end of period
(in thousands) 1,083 1,233 876 844 821
Sales per selling square foot $ 203 $ 187 $ 169 $ 161 $ 143
Sales per gross square foot $ 161 $ 149 $ 135 $ 129 $ 115
Average sales per store (in thousands) $ 4,665 $ 4,244 $ 3,984 $ 3,758 $ 3,360
</TABLE>
(1) See Note 1 of Notes to Financial Statements.
(2) Comparable store sales are calculated by excluding the net sales of stores
for any week of one period if the store was not open during the same week of
the prior period. Net sales are not included for the first four weeks following
a store opening. In fiscal 1995, a 53 week year, the extra week was excluded
from comparable store sales.
11
<PAGE> 12
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
NUMBER OF STORES
<TABLE>
<CAPTION>
Fiscal 1994 Fiscal 1995 Fiscal 1996
----------- ----------- -----------
<S> <C> <C> <C>
Beginning of year 46 30 29
First Quarter Additions 2 0 0
First Quarter Dispositions (1) 0 0
Second Quarter Dispositions (17) (1) 0
Third Quarter Dispositions 0 0 (1)
--- --- ---
END OF YEAR 30 29 28
--- --- ---
</TABLE>
RESULTS OF OPERATIONS
As a percentage of sales
<TABLE>
<CAPTION>
Fiscal 1994 Fiscal 1995 Fiscal 1996
----------- ----------- -----------
<S> <C> <C> <C>
Net Sales 100.0% 100.0% 100.0%
Cost of goods sold, including buying
and distribution costs 72.5 76.0 70.9
----- ----- -----
Gross Profit 27.5 24.0 29.1
Selling, general and administrative
expenses 28.1 27.0 29.6
Depreciation and amortization 2.7 2.6 2.5
Store closing expenses -- -- --
Write down of property and equipment -- -- 0.5
Non recurring item -- -- 0.5
----- ----- -----
Operating loss (3.3) (5.6) (4.0)
Interest expense .8 1.0 1.7
----- ----- -----
Loss before income taxes,
reorganization and extraordinary items (4.1) (6.6) (5.7)
----- ----- -----
Reorganization items 4.5 1.6 --
Provision for (benefit from) income taxes 2.6 (1.3) --
----- ----- -----
Loss before extraordinary item (11.2) (6.9) (5.7)
Extraordinary item, net of tax -- 2.5 --
----- ----- -----
Net Loss (11.2)% (4.4)% (5.7)%
===== ===== =====
</TABLE>
12
<PAGE> 13
PLAN OF REORGANIZATION
On July 21, 1994 (the "Petition Date"), the Company filed a petition
(the "Filing") under Chapter 11 of the Bankruptcy Code ("Chapter 11") in the
United States Bankruptcy Court for the Western District of Texas (the
"Bankruptcy Court"). On July 6, 1995, the Bankruptcy Court approved a Proposed
Plan of Reorganization (the "Plan") jointly sponsored by the Official Committee
of Unsecured Creditors and Texas Commerce Bank San Antonio, N.A. ("TCB"), which
became effective on July 18, 1995. Under the Plan, the Unsecured Creditors
agreed to a distribution of 72.5% of pre- petition unsecured allowed claims.
The total amount of pre-petition unsecured allowed claims was $15.6 million.
Additionally, the Plan allowed for cash distributions for certain secured and
priority claims which totaled $2.2 million. On the effective date of the Plan,
the Company issued 1,388,889 shares of convertible Preferred Stock for an
aggregate consideration of $2.5 million. All of the Preferred Stock was
purchased by General Atlantic Corporation ("GAC"), the Company's largest
stockholder. On July 31, 1995, the Company disbursed $10.2 million to its
creditors in accordance with the First Distribution as proposed by the Plan.
The second and final distribution, which occurred on December 20, 1995, was
approximately $3.5 million. The second distribution was financed in part by
$2.5 million of funds in escrow which were the proceeds from the sale of the
Company's Preferred Stock. As of February 3, 1996, the Company had "Contested
Claims" of approximately $461,000 which have been classified as Liabilities
Subject to Compromise. As of February 1, 1997, the Company has settled all
known claims.
Pursuant to the Plan the Company's existing common stock was subject
to a one-for-two reverse split. The Preferred Stock issued in connection with
the Plan has a liquidation value of $1.80 per share, is convertible to an equal
number of common shares, has voting rights on an as converted basis, and pays
no preferential dividends. With the issuance of Preferred Stock mentioned
above, GAC has increased its percentage ownership of the voting shares of the
Company to approximately 62% from its pre-reorganization interest of
approximately 44%.
The settlement of the Company's pre-petition liabilities reduced the
Company's net operating loss carry-forwards and other tax credit carry-forwards
by approximately $4.2 million. The above mentioned equity infusion by GAC has
not caused an ownership change that would limit the future utilization of the
Company's remaining net operating loss carry-forwards and other tax credit
carry-forwards. However, future ownership changes could result in such
limitations.
In an effort to improve the Company's financial performance and in
connection with the Company's bankruptcy reorganization, the Company reduced
its number of stores, implemented expense reductions commensurate with the
downsizing of the total stores in operation, and improved liquidity by
restructuring its pre-petition debt and obtaining a new credit facility. Since
the bankruptcy, the Company has continued to experience lower than anticipated
sales and continuing operating losses. The Company's business has been
adversely affected by a number of factors, including increased competition in
its principal markets, weakness in the apparel industry, unfavorable economic
conditions in certain markets and other factors, many of which are not within
the Company's control. Increased competitive pricing and promotional strategies
have put significant downward pressure on price points, and competitors have
opened additional store locations in the Company's principal markets. While the
Company has maintained inventory at planned levels, the Company has experienced
some reduction in the availability of trade credit, and continuing unfavorable
business conditions and financial performance could heighten vendor and factor
concern regarding the Company's creditworthiness, which could adversely affect
the Company's ability to receive sufficient trade credit support to acquire
adequate levels of inventory in the future.
FISCAL 1996 VERSUS FISCAL 1995
Net revenues for fiscal 1996 decreased 13.3% from the prior year to
$95.2 million from $109.8 million. Comparable stores net sales decreased 10.6%.
Management attributes the sales decline principally to increased competitive
pressures in its market areas, continuing unfavorable economic conditions in
some of the Company's principal markets, less promotional activities than in
comparable periods of fiscal 1995, and the effect that the Company's bankruptcy
had on its core customers, whose purchasing decisions management believes to be
driven by the availability of certain branded products, which the Company had
difficulty obtaining immediately preceding
13
<PAGE> 14
and during the bankruptcy period. Net revenues were favorably impacted $559
thousand by the reclassification of certain revenue items which had been
accounted for as a reduction in SG&A expenses in prior years.
Gross profit for fiscal 1996 increased $1.5 million to $27.8 million
from $26.3 million in the prior year. Gross profit as a percentage of net sales
increased to 29.1% from 24.0% in fiscal 1995. The increase in gross profit
percentage resulted principally from reduced shrinkage, reduced promotional
activity, selectively higher initial markups, reduced buying and distribution
costs from those experienced in fiscal 1995, the above-referenced
reclassification of certain revenue items which had been accounted for as a
reduction in SG&A expenses in prior years, and the reclassification of certain
expense items that had been accounted for as costs of goods sold in 1995.
Selling, general and administrative expenses for fiscal 1996 decreased
$1.4 million, or 4.7%, to $28.2 million from $29.6 million for the prior year.
The decrease was the result of cost cutting measures, the closing of one under-
performing store, termination of the Company's Post Retirement Benefit Plan,
and adjustments to various balance sheet balances off-set by an increase in
SG&A expenses due to the above-referenced reclassification of certain revenue
items which had been accounted for as a reduction in SG&A expenses in prior
years. Depreciation and amortization expenses for fiscal 1996 decreased 14.3%
to $2.4 million from $2.8 million primarily due to some assets becoming fully
depreciated.
During the second quarter of fiscal 1997, the Company plans to close
one store and to implement plans to either close or operate in some reduced
capacity two additional stores. At fiscal year end 1996, based on the revised
cash flow estimates from these locations, the Company has written down the
non-recoverable net book value ($525 thousand) of leasehold improvements and
fixtures and equipment associated with the locations in accordance with FAS
121.
The Company also recognized and recorded an unanticipated and
non-recurring charge of $464 thousand in January 1997 which related to fiscal
1996. In recent years, the Company self-insured workers' compensation and
medical insurance for its employees and purchased stop-loss coverage to limit
its maximum exposure. In late fiscal 1996, a dependent of one of the Company's
former employees who is covered by COBRA required expensive medical treatment
which was not covered by the stop-loss provider, and the majority of this
accrual relates to this claim. The Company's stop-loss providers have denied
coverage for these claims, and the Company has accrued for management's best
estimate of the Company's maximum exposure. Management also believes that it is
possible that some of these costs may be recovered from the stop-loss provider.
Effective January 1, 1997, the Company purchased fully insured coverage for
medical and workers' compensation insurance.
The Company experienced an operating loss, after the $525 thousand
write down of fixed assets and the $464 thousand reserve for the non-recurring
item, of $3.9 million in fiscal 1996 compared to an operating loss of $6.1
million in fiscal 1995.
Net interest expense increased to $1.6 million in fiscal 1996 from
$1.1 million in the prior year. During the pendency of the Chapter 11 case in
fiscal 1995, the Company accrued interest on approximately $5.9 million in
indebtedness secured by a first mortgage on the Company's distribution center,
but did not accrue interest on any other pre-petition indebtedness. Interest
expense on all indebtedness was accrued following the confirmation of the Plan.
Had the Company accrued interest on all of its indebtedness for the full year,
the interest expense for fiscal 1995 would have been approximately $1.8 million
yielding a pro forma decrease in net interest expense of $200 thousand.
For 1996, management developed and implemented a business strategy
which sought to achieve higher gross margins on lower comparable store sales
than in fiscal 1995. The key elements of this strategy were lower average store
inventories, quick price reduction on slower moving merchandise, constant flow
of fresh merchandise, less promotional pricing, and a significantly reduced
expense structure. The Company also implemented programs designed to achieve
significant cost reductions on an annualized basis, including reductions in
SG&A expenses, and buying and distribution costs. It is expected that these
additional reductions will be fully realized in 1997. Although management
believes this business strategy is appropriate in light of business conditions
and recent sales trends, the Company's sales results have continued to be
disappointing and the
14
<PAGE> 15
Company has continued to experience operating losses. No assurance can be given
that the Company will be successful in its efforts to improve sales and
operations and reverse recent operating trends.
FISCAL 1995 VERSUS FISCAL 1994
Net sales for fiscal 1995 decreased 21% from the prior year to $109
million from $139 million. This decrease was attributable to the closing of
certain under-performing stores in 1994 and 1995 ($24 million) and a 5.6%
comparable store sales decrease ($6 million). Management attributes this
decline to the continuing weakness in the apparel industry, unfavorable
economic conditions in the Company's principal markets and increased
competitive pressure.
Gross profit for fiscal 1995 decreased $12 million to $26 million from
$38 million in the prior year. Gross profit as a percentage of sales declined
to 24% from 27.5% in fiscal 1994. The decrease in gross profit percentage was
primarily attributable to promotional markdowns associated with lower than
expected sales, increased inventory shrinkage, and an increase in distribution
and buying costs associated with increased flow of new merchandise relative to
the same period of the prior year.
Selling, general and administrative expenses for fiscal 1995 decreased
24% to $30 million from $39 million for the prior year primarily due to the
closing of certain under-performing stores in 1994 and 1995 and the
implementation of cost-cutting measures. The Company continues to evaluate and
implement certain cost-cutting measures designed to reduce expenses without
unduly impairing levels of customer service. Depreciation and amortization
expenses for fiscal 1995 decreased 25% to $2.8 million from $3.7 million due to
operating fewer stores.
The Company experienced an operating loss of $6.1 million in fiscal
1995 compared to an operating loss of $4.5 million in fiscal 1994.
Net interest expense of $1.1 million in fiscal 1995 was approximately
the same as fiscal 1994. During the pendency of the Chapter 11 case, the
Company accrued interest on approximately $5.9 million in indebtedness secured
by a first mortgage on the Company's distribution center, but did not accrue
interest on any other pre-petition indebtedness. Interest expense on all
indebtedness was accrued following the confirmation of the Plan. Had the
Company accrued interest on all of its indebtedness for the full year, the
interest expense for fiscal 1995 would have been approximately $1.8 million.
15
<PAGE> 16
SEASONALITY AND QUARTERLY FLUCTUATIONS
The following table sets forth certain unaudited quarterly information of the
Company and includes all adjustments (consisting of normal recurring
adjustments) that management considers necessary for a fair presentation of
such information for the interim periods. The operating results for any quarter
are not necessarily indicative of results for any future period.
FISCAL 1995
<TABLE>
<CAPTION>
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net revenues $ 25,176 $ 28,271 $ 24,249 $ 32,126
Gross Profit 6,082 7,312 6,000 6,954
Operating loss (2,102) (771) (2,139) (1,074)
Loss before reorganization items, income taxes
and extraordinary item (2,267) (940) (2,500) (1,509)
Reorganization items 373 1,413 0 0
Extraordinary item - gain on discharge of debt 0 (2,753) 0 0
Income tax benefits 0 (1,418) 0 0
Net loss (2,640) (1,818) (2,500) (1,509)
Net loss per share of common stock* $ (0.93) $ (0.60) $ (.59) $ (0.36)
Number of stores opened during quarter 0 0 0 0
Number of stores closed during quarter 0 1 0 0
</TABLE>
FISCAL 1996
<TABLE>
<CAPTION>
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net revenues $ 22,260 $ 28,070 $ 21,208 $ 23,700
Gross Profit 6,516 7,568 6,371 7,298
Net loss (973) (1,221) (1,472) (1,819)
Net loss per share of common stock* $ (.34) $ (.43) $ (.52) $ (.63)
Number of stores opened during quarter 0 0 0 0
Number of stores closed during quarter 0 0 1 0
</TABLE>
*Amounts have been restated, where applicable, to give effect to the Company's
one-for-two reverse stock split in fiscal 1995.
16
<PAGE> 17
COMPARABLE STORE SALES
The following table sets forth for fiscal 1994, fiscal 1995, and
fiscal 1996 certain information regarding the percentage decrease in total
comparable store sales adjusted so that all amounts relate to 52 weeks for the
fiscal years.
Fiscal 1996
<TABLE>
<CAPTION>
Fiscal Fiscal First Second Third Fourth
1994 1995 Quarter Quarter Quarter Quarter Year
---- ---- ------- ------- ------- ------- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Total (11%) (6%) (11%) (12%) (6%) (13%) (11%)
</TABLE>
Management attributes the comparable store net sales decrease
principally to increased competitive pressures in its market areas, continuing
unfavorable economic conditions in some of the Company's principal markets,
less promotional activities than in comparable periods of fiscal 1995, and the
effect that the Company's bankruptcy had on its core customers, whose
purchasing decisions management believes to be driven by the availability of
certain branded products, which the Company had difficulty obtaining
immediately preceding and during the bankruptcy period. Net revenues were
favorably impacted $559 thousand by the reclassification of certain revenue
items which had been accounted for as a reduction in SG&A expenses in prior
years. Management believes that the current product offering of better branded
products is improved as compared to that available to the Company during the
bankruptcy period.
In fiscal 1996, the continuing overall weakness in retail apparel
sales in the Company's principal markets stimulated price competition among
existing competitors and traditional department and specialty stores put
downward pressure on price points. Additionally two major national chain
off-price retailers added stores in the San Antonio market where 12 of the
Company's 28 stores are located.
Management believes that fourth quarter sales were also impacted by
the reduction of selling days in fiscal 1996 the traditional Christmas selling
season. There were five fewer selling days between Thanksgiving and Christmas in
1996 than in 1995. Additionally, in December 1995, the Company had greater sales
promotions than in the same period of fiscal 1996, and in January 1996, the
Company had a higher volume of clearance sales activity than in the same period
of fiscal 1996.
During the first quarter of fiscal 1997, comparable store sales
declined 9.3% over the same period in fiscal 1996 ($17.6 million compared to
$19.5 million). While management had planned for lower comparable store sales
during this period, the decline in comparable store sales was greater than
anticipated. Management attributes the decline in part to competition in its
principal markets, to soft Easter sales, and to a record cold April in south
and south-central Texas where 20 of its 28 stores operate.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities before reorganization items in
fiscal 1996 improved by $6.7 million, when compared to fiscal 1995. $1.1 million
was provided by operating activities in fiscal 1996, whereas cash was used by
operating activities in fiscal 1995 of $5.6 million. The improvement was
primarily the result of decreases in inventories ($3.1 million) and other
current assets ($1.3 million), and an increase in accounts payable ($600
thousand). Capital expenditures were $300 thousand and consisted primarily of
replenishment and refurbishment of existing equipment and facilities.
As part of its Plan of Reorganization, the Company restructured its
pre-petition secured indebtedness. Under the Plan, the Company assumed a $5.8
million mortgage note, secured by the Company's corporate office and
distribution center in San Antonio, Texas. The mortgage note carries an
interest rate of 9.5% per annum and requires monthly payments of principal and
interest of $49,773 until December 2002, when the balance of $5.4 million is
due. The Company also modified and assumed a note payable to MetLife Capital
Corporation ("MetLife"), which is secured by various equipment and fixtures
located at the corporate office and certain stores. The MetLife note carries an
interest rate of 8.0% and requires equal monthly payments, including principal
and interest, of $35,044 until September 1998, when the balance of $35,000 is
due. The Company also entered into a term note payable to TCB which carries an
interest rate of prime plus one-half percent and is due in equal monthly
installments of principal and interest of $64,117 until January
17
<PAGE> 18
1999, when the balance of $4.5 million is due. The TCB note is secured by the
Company's three owned store locations.
The Company entered into a loan agreement with Congress Financial
Corporation (Southwest) ("Congress") on June 20, 1995, which became effective
on the effective date of the Plan. Under the terms of the loan agreement, the
Company may borrow up to its borrowing base as calculated pursuant to the loan
agreement, which may not exceed $15.0 million. The proceeds of the loan may be
used for letters of credit, working capital, and general corporate purposes
consistent with past practices. The loan as amended is a revolving loan with a
borrowing base formula which limits the amount of available credit to 60% of
the Company's eligible inventory during the period of March 1 to May 15, and
September 1 to December 1 of each year and to 55% of the Company's eligible
inventory during any other period less (i) open letters of credit and (ii)
availability reserves established from time to time by the lender. The loan
bears interest at the prime rate of Core States Bank, N.A. plus 1%. In
addition, the Company pays a commitment fee equal to 1/2% per annum of the
amount of the unused facility and other fees associated with changes in certain
covenants since the effective date of the loan agreement. The loan is secured
by substantially all the assets of the Company other than those subject to
other existing liens.
The Company and Congress have amended certain financial covenants in
the loan agreement to require minimum working capital of $3.25 million, minimum
net worth of $800 thousand, and a $2.5 million annual limitation on capital
expenditures, net of insurance or other proceeds resulting from the disposal or
sale of fixed assets, for the remaining term of the loan. Congress has also
proposed, and the amendment includes, an extension of the term of the loan
agreement from July 1998 to July 1999. Under the loan agreement, Congress may
establish and revise availability reserves in its sole discretion to cover
risks or events it perceives may affect its security under the loan or the
business or prospects of the Company. As a result of the formula by which the
borrowing base is calculated, an increase in availability reserves restricts
the Company's access to borrowings under the credit facility. The current
availability reserve under the loan agreement approximates $660 thousand.
In addition to the Congress credit facility, the Company is dependent
upon short term trade credit as a source of inventory financing. Short term
trade credit arises from the willingness of the Company's vendors to grant
payment terms for inventory purchases and is either financed by the vendor or a
third party factoring institution. The Company's inventories were $3.1 million
less at fiscal year end 1996 than at fiscal year end 1995 and accounts payable
increased $600 thousand. Of the $1.3 million reduction in other current assets,
$936 thousand was the result of reducing advance payments to third-party
factoring institutions.
During the first quarter of fiscal 1997, the Company's sales have
continued to be adversely affected by a number of factors, including increased
competition in its principal markets, weakness in the apparel industry,
unfavorable economic conditions in certain markets and other factors, many of
which are not within the Company's control. Increased competitive pricing and
promotional strategies have put significant downward pressure on price points,
and competitors have opened additional store locations in the Company's
principal markets. While the Company has maintained inventory at planned
levels, the Company has experienced some reduction in the availability of trade
credit, and continuing unfavorable business conditions and financial
performance could heighten vendor and factor concern regarding the Company's
creditworthiness, which could adversely affect the Company's ability to receive
sufficient trade credit support to acquire adequate levels of inventory in the
future. No assurance can be given that the Company will be successful in its
efforts to improve sales and operations and reverse operating trends. Because
of these uncertainties, any investment in the Company's common stock should be
considered speculative.
The Company owns the real estate and improvements on which three of
its Solo Serve stores in San Antonio, Texas are located and leases the
remainder of its stores. During 1996, the Company listed all of its owned
properties for sale, including the distribution center. The Company has entered
into an earnest money contract providing for the sale and leaseback of one of
its owned store locations, which contract is subject to a number of conditions.
No assurances can be made that the transaction will close. The Company
continues to consider alternatives with regard to its remaining owned real
estate including sale/leaseback or, subject to availability of suitable
locations, outright sale of any of the three properties. The Company has
received and is evaluating proposals on all of its remaining owned real estate.
These proposals generally contemplate the sale/leaseback of the properties in
question although the Company may also consider out-right sale of the
properties under certain circumstances. No assurance can be given that the
pending proposals will result in definitive agreements relating to any of the
remaining properties, and all of the properties are pledged to secure certain
indebtedness of the Company. However, disposition of the Company's owned real
estate on terms proposed by the Company would enhance the Company's liquidity
and provide additional cash for operations.
18
<PAGE> 19
In order to reduce chain-wide inventories, reduce debt and enhance its
cash position, the Company will close one store in the second quarter of fiscal
1997. For the same reasons, the Company is also considering closing, or
operating in some reduced capacity two additional stores, subject to
satisfactory arrangements with landlords.
If current sales trends continue and other initiatives are not
successful in improving overall financial performance and meeting liquidity
requirements, the Company would consider other alternatives, including
additional reductions in the Company's scale of operations and implementation
of additional measures designed to reduce expenses.
Forward-looking Statements
Forward-looking statements in this Annual Report are made pursuant to
the safe harbor provisions of the Private Securities Litigation Reform Act of
1995. There are certain important factors that could cause results to differ
materially from those anticipated by some of the statements made above.
Investors are cautioned that all forward-looking statements involve risks and
uncertainty. In addition to the factors discussed above, among the other
factors that could cause actual results to differ materially are the following:
general economic conditions, consumer demand and preferences, and weather
patterns in the Company's markets; competitive factors, including continuing
pressure from pricing and promotional activities of competitors; impact of
excess retail capacity; the availability, selection and purchasing of
attractive merchandise on favorable terms; availability of financing; and
relationships with vendors and factors. Additional information concerning those
and other factors are contained in the Company's Securities and Exchange
Commission filings, copies of which are available from the Company without
charge. The Company does not undertake to publicly update or revise its
forward-looking statements even if experience or future changes make it clear
that any projected results expressed or implied therein will not be realized.
ITEM 8. FINANCIAL STATEMENTS
For the financial statements and supplementary data required by this
Item 8, see the Index to Consolidated Financial Statements and Schedules.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
19
<PAGE> 20
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
DIRECTORS
Certain information concerning the directors, including all positions
they hold with the Company and their principal occupations during the last five
years, is set forth below:
Robert J. Grimm, age 58, has been with the Company since 1960. He has
been Chairman of the Board since March 1992, and was Chief Executive Officer
from 1979 until July 1995, when he became a consultant to the Company. He
served as President from 1979 until December 1994. He had previously served in
various buying and merchandising positions with the Company.
Stephen P. Reynolds, age 45, has been a director of the Company since
1981. Mr. Reynolds has been a General Partner of General Atlantic Partners
since its formation in 1989, prior to which time he was the Treasurer of
General Atlantic. Mr. Reynolds is a member of the board of directors of several
privately-held companies in which General Atlantic Partners, General Atlantic,
or one of their affiliates is an investor.
John C. Seiler, age 62, has been a director of the Company since May
1988. Mr. Seiler was Vice President of Associated Dry Goods from 1972 to 1981,
serving as Chairman and Chief Executive Officer of that company's Stewart Dry
Goods Division (Louisville, KY) from 1974-1981. Mr. Seiler has maintained a
retail consulting business, owned retail stores in Louisville (Ports
International -- TABI International, 1982-1988), and served on the board of
directors of Citizens Fidelity Bank and Trust Co. (1974-1989), Maker's Mark
Distillery (1976-1981), and Duty Free Shoppers Limited (1982-1986).
Walter H. Teninga, age 69, has been a director of the Company since
December 1991. Mr. Teninga is the founder of the Warehouse Club, Inc., a
publicly-held wholesale membership company that is no longer in business, and
served as its Chairman of the Board and Chief Executive Officer from 1982 to
1991. Prior to that time, Mr. Teninga served as President of the Northern
Division of the Price Company and as Vice Chairman and Chief Financial and
Development Officer of K mart Corporation. Mr. Teninga currently serves on the
Board of Directors of Great Lakes REIT and Developers Diversified Realty
Corporation, and served on the board of the Michigan National Corporation until
November 1995.
Charles M. Siegel, age 58, became employed by the Company in August
1996 as President and Chief Executive Officer. He joined the Company as a
full-time consultant and Acting Chief Operating Officer in early July 1996.
Prior to joining the Company, Mr. Siegel was President, Chairman and Chief
Executive Officer of 50-Off Stores, Inc., which in 1988 became the successor
organization to Shoppers World stores, for which Mr. Siegel was a member of the
founding executive group in 1975.
The Board of Directors has three committees. The Audit Committee of
the Board of Directors consists of Messrs. Reynolds, Seiler, and Teninga. The
functions of the Audit Committee are to recommend the appointment of the
Company's independent auditors, to review the arrangements for and the scope
and results of the annual audit and to review internal accounting controls. The
Compensation Committee of the Board of Directors consists of Messrs. Grimm,
Reynolds, Seiler and Teninga. The functions of the Compensation Committee are
to review and make recommendations concerning the compensation of officers and
other management personnel. The Stock Option Committee of the Board of
Directors consists of Messrs. Reynolds and Seiler. The function of the Option
Committee is to administer the Company's Stock Option Plan. The Board of
Directors does not have a standing nominating committee or a committee which
performs similar functions.
None of the directors or the executive officers of the Company has a
family relationship with any of the other executive officers or other nominees
for director. Except for Mr. Teninga, who is a director of Great Lakes REIT and
Developers Diversified Realty Corporation, and Mr. Reynolds, who is a director
of Computer Learning Centers, Inc., none of the directors or nominees is a
director of any other company which has a class of securities
20
<PAGE> 21
registered under, or is required to file reports under, the Securities Exchange
Act of 1934 or of any company registered under the Investment Company Act of
1940.
EXECUTIVE OFFICERS
Certain information is set forth below concerning the executive
officers of the Company, each of whom has been selected to serve until the 1997
annual meeting of directors and until his or her successor is duly elected and
qualified.
Charles M. Siegel, age 58, became employed by the Company in August
1996 as President and Chief Executive Officer. He joined the Company as a
full-time consultant and Acting Chief Operating Officer in early July 1996.
Prior to joining the Company, Mr. Siegel was President, Chairman and Chief
Executive Officer of 50-Off Stores, Inc., which in 1988 became the successor
organization to Shoppers World stores, for which Mr. Siegel was a member of the
founding executive group in 1975.
Ross E. Bacon, age 52, became Chief Operating and Financial Officer
and Executive Vice President of the Company in September 1996. He had joined
the Company in July 1996 as Chief Financial Officer. From 1994 to 1996, Mr.
Bacon was a self-employed financial consultant, and from 1993 to 1994, he was
Vice President and Chief Financial Officer of Telecommunications Management,
Inc., the parent company of Discount Cellular Paging, a San Antonio-based
cellular telephone and paging company. Mr. Bacon was Vice President and Chief
Financial Officer of Flowers to Go, Inc. from 1992 until 1993.
SECTION 16(a) REPORTS
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's executive officers and directors, and persons who own more than ten
percent of the Company's Common Stock, to file reports of ownership and changes
in ownership with the Securities and Exchange Commission. Executive officers,
directors, and greater-than-ten-percent stockholders are required by SEC
regulation to furnish the Company with copies of all Section 16(a) forms they
file.
Except as set forth in this paragraph, the Company believes, based
solely on its review of the copies of Section 16(a) forms furnished to the
Company and written representations from executive officers and directors, that
all Section 16(a) filing requirements have been fulfilled. Mr. Walter Teninga
filed a Form 4 for September 1996 on October 15, 1996. Each of Mr. Charles M.
Siegel and Mr. Ross E. Bacon became subject to filing Section 16 reports on
August 8, 1996 and July 15, 1996, respectively, but did not file Form 3's until
September 20, 1996 and September 5, 1996, respectively. Mr. Ross E. Bacon filed
a Form 4 for October 1996 on April 21, 1997.
ITEM 11. EXECUTIVE COMPENSATION
Compensation Summary
The following table sets forth a summary of compensation for the
fiscal years ended February 1, 1997, February 3, 1996, and January 28, 1995
paid by the Company to the Company's President, Charles Siegel, and the most
highly-compensated executive officers of the Company who received more than
$100,000 in compensation during fiscal 1996, Ross Bacon. Also included is
information for David P. Dash, who was the Chief Executive Officer of the
Company until August 8, 1996. Stock options listed for fiscal year 1994 were
cancelled on July 18, 1995, the Effective Date of the Company's Plan of
Reorganization under Chapter 11 of the U.S. Bankruptcy Code, as described
below, and do not reflect the 1-for-2 reverse split otherwise effective to the
Common Stock of the Company on the Effective Date. Except as described below,
compensation listed in column (i) consists of life and health insurance
premiums paid by the Company for the named executive.
21
<PAGE> 22
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term Compensation
-----------------------------
Annual Compensation Awards Payouts
---------------------------------------- -------------------- -------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Other Restricted
Annual Stock Stock LTIP All Other
Name and Principal Fiscal Salary Bonus Compen- Award(s) Options Payouts Compen-
Position Year ($) ($) sation($) ($) (Shares) ($) sation($)
- -------- ---- ------- ------- --------- ------- -------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Charles Siegel, 1996 173,679 100,000 0 0 100,000 0 28
President (1)
- ----------------------------------------------------------------------------------------------------------
David P. Dash, 1996 135,865 0 0 0 0 0 61
Former President (2) 1995 250,000 62,500 0 0 175,000 0 5,298
1994 35,096 25,000 0 0 150,000 0 10
- ----------------------------------------------------------------------------------------------------------
Ross Bacon, COO (3) 1996 64,801 0 0 0 50,000 0 39
- ----------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------
(1) Mr. Siegel became a consultant to the Company on June 26, 1996 pursuant to
the terms of a Consulting Agreement. See "Agreements Related to Employment
and Compensation" in this Report. On August 8, 1996, he succeeded Mr. Dash
as President of the Company. The amount listed as "salary" for fiscal 1996
includes consulting fees of $42,854. The $100,000 bonus was part of the
compensation package paid upon execution of his employment agreement. At
Fiscal Year End 1996, Mr. Siegel held options to purchase 100,000 shares
of Common Stock, all of which were vested and none of which were at an
exercise price lower than the market price of the Common Stock on that
date.
(2) Mr. Dash was succeeded by Mr. Charles Siegel as President of the Company
on August 8, 1996. Mr. Dash joined the Company during fiscal 1994 pursuant
to the terms of an Employment Agreement approved by the Bankruptcy Court.
See "Agreements Related to Employment and Compensation" in this Report. At
Fiscal Year End 1996, all options previously held by Mr. Dash had
terminated unexercised. Column (i) includes $5,196 in relocation expenses
paid by the Company in 1995.
(3) Mr. Bacon joined the Company during fiscal 1996. At Fiscal Year End 1996,
Mr. Bacon held options to purchase 50,000 shares of Common Stock, 15,000
of which were vested and none of which were at an exercise price lower
than the market price of the Common Stock on that date.
22
<PAGE> 23
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Potential Realizable Value
% of Total at Assumed Annual Rates of
Options Exercise Stock Price Appreciation
Options Granted to Price Per Expiration for Option Term(1)
Name Granted Employees Share Date
(a) (b) (c) (d) (e) (f) (g)
==============================================================================================
5% 10%
--------------------------
<S> <C> <C> <C> <C> <C> <C>
Charles Siegel 25,000 8.9% $ 0.375 7/01/01 $11,965 $15,099
75,000 26.7% $ 0.25 8/08/06 $30,542 $48,633
David P. Dash 0 n/a n/a n/a n/a n/a
Ross Bacon 20,000 7.1% $ 0.4375 7/15/06 $14,253 $22,695
30,000 10.7% $ 0.25 10/07/06 $12,217 $19,453
</TABLE>
(1) At Fiscal Year End 1996, all of the options held by employees and directors
were exercisable at a price that exceeded fair market value of the common stock
underlying the options.
AGGREGATED OPTION EXERCISES IN
LAST FISCAL YEAR AND FY-END OPTION VALUES
<TABLE>
<CAPTION>
(a) (b) (c) (d) (e)
Number of Value of Unexercised
Unexercised In-The-Money
Options at Options at
Shares FY-End (#) FY-End ($)
Acquired on Value Exercisable/ Exercisable/
Name Exercise (#) Realized ($) Unexercisable Unexercisable
- ---- ------------ ------------ ------------- -------------
<S> <C> <C> <C> <C>
Siegel 0 0 100,000/0 $0/0
Dash 0 0 0/0 $0/0
Bacon 0 0 15,000/35,000 $0/0
</TABLE>
COMPENSATION OF DIRECTORS
Directors who are not also officers or full-time employees of the
Company were paid a total retainer fee of $12,500 for the fiscal year ended
February 1, 1997. These directors are also paid $1,000 for each duly called
meeting of the Board of Directors that such persons attend (not to exceed
$4,000 per year) and $250 for each telephonic meeting of the Board of Directors
in which they participate, and are reimbursed for reasonable expenses of
travel, meals and accommodations in connection with meetings.
On the Effective Date of the Company's Plan of Reorganization under
Chapter 11 of the U.S. Bankruptcy Code, all previously outstanding options to
purchase Common Stock of the Company were cancelled, including those options
held by the members of the Board of Directors. Pursuant to the terms of the
Plan, a new director stock option plan, the Solo Serve Non-officer Director
Option Plan (the "New Director Plan"), became effective on the Effective Date.
The New Director Plan is a non-discretionary plan which authorized the grant of
non-statutory stock options to acquire an aggregate of 135,000 shares of Common
Stock to those persons who are directors and not officers of the Company. The
number of shares for which options may be granted are subject to adjustment in
the event of a stock dividend, split up or combination of stock, or
reclassification of shares of stock.
23
<PAGE> 24
Pursuant to the terms of the New Director Plan, each director of the
Company was initially granted an option to acquire 20,000 shares of Common
Stock on September 1, 1995. Directors who join the Board for the first time on
or after that date will be granted 20,000 options on the date they become
directors of the Company. In addition to these initial grants, directors would
receive annual grants thereafter of 1,000 options, on the first day following
the Annual Meeting of Stockholders of the Company after September 1, 1995,
provided that the director remains a member of the Board on such date. The
option price per share for each option is the fair market value (as defined in
the New Director Plan) of the Common Stock on the date of grant. The New
Director Plan contains change of control adjustment provisions substantially
similar to those in the New Incentive Plan, as described below. Grants of
Options shall vest over a three-year period, forty percent (40%) six (6) months
after the date of grant, and twenty (20%) percent on each of the next three
anniversaries of the date of grant. Each option expires on the tenth
anniversary of the date of grant. No option granted under the New Director Plan
is transferable other than by will or the laws of descent and distribution.
Although the New Director Plan may be amended by the Board of
Directors, stockholder approval is required for any amendment which will (i)
increase the aggregate number of shares of Common Stock that may be issued and
sold under the New Director Plan, or (ii) change the designation of class for
persons eligible to receive options. The New Director Plan also provides that
the provisions of the New Director Plan relating to (i) the number of shares of
Common Stock for which an option may be granted, (ii) the option price, and
(iii) the timing of the grant and vesting of an option, may not be amended more
than once every six months, with the exception of amendments required to be
made so that the New Director Plan continues to comply with the Internal
Revenue Code, ERISA, or the rules promulgated thereunder.
Options granted under the New Director Plan would be nonqualified
stock options. The U.S. Federal tax treatment of nonqualified stock options is
as follows:
1. The grant of a nonqualified option results in neither taxable
income to the option holder nor a tax deduction to the Company.
2. Except as noted in paragraph 3 below, when an option holder
exercises such an option he will realize, for federal income tax purposes,
ordinary income in the amount of the difference between the option price and
the then fair market value of the shares, and the Company will be entitled to a
corresponding deduction if federal income tax withholding requirements are
satisfied. Any such ordinary income will increase the option holder's tax basis
for the purpose of computing his gain or loss on the later sale or exchange of
the shares.
3. With respect to options exercised by officers and directors of
the Company who could be subject to Section 16(b) of the Securities Exchange
Act of 1934, instead of the tax treatment described in paragraph 2 above, a
different rule will apply unless an election is filed by the option holder with
Internal Revenue Service under Section 83(b) of the Code within 30 days of the
date the option is exercised. If such an election is not filed, such option
holder will recognize ordinary income upon the lapse of the Section 16(b)
restrictions (rather than on the exercise of the option) in the amount by which
the fair market value of the shares on the date the restriction lapses exceeds
the option price, and the Company will be entitled to a corresponding deduction
at such time. Any such ordinary income will increase the option holder's tax
"basis" for the purpose of computing his gain or loss on the sale or exchange
of the shares.
4. Upon the subsequent sale or exchange by the option holder of
stock purchased upon exercise of the option, any excess of the selling price
over the option holder's tax basis (which tax basis will generally equal the
amount paid for the shares plus the ordinary income recognized as described in
paragraphs 2 and 3 above) will be treated as capital gain, and any diminution
of such selling price below his purchase price will be treated as capital loss.
If the holding period and other requirements of the capital gains provisions
are satisfied, any profit realized by the option holder on such a later sale or
exchange of such shares will be long-term capital gain and any loss will be
long-term capital loss. A resale by the option holder has no tax consequence as
far as the Company is concerned.
24
<PAGE> 25
The exercise price of existing stock options held by members of the
Board of Directors is $2.125 per share. The Board of Directors determined
during a Board Meeting in April 1997 to modify outstanding options held by
Directors such that the strike price of the outstanding options would be
changed to the current market price for the Company's common stock at the time
of the modification. Such modification had not yet been implemented as of the
date of this Report, but is expected to be implemented during May 1997.
Agreements Relating to Employment and Compensation
In June 1996, the Company entered into a consulting agreement with
Charles M. Siegel pursuant to which Mr. Siegel was to function as the acting
Chief Operating Officer for the Company. The agreement provided for a term
expiring January 31, 1997, total consulting fees of $150,000 payable in 7 equal
installments of $21,428.57, and the grant of options to purchase 25,000 shares
of Company common stock. The agreement also imposed a duty of confidentiality
regarding the Company's Confidential Matters, and prohibited Mr. Siegel from
competing with the Company through January 31, 1997.
On August 8, 1996, the Company entered into an employment agreement
with Mr. Siegel. Pursuant to the Agreement, Mr. Siegel became President and
Chief Executive Officer of the Company. Mr. Siegel is eligible to receive
severance benefits equal to six months' base salary if he is terminated by the
Company without "cause" as that term is defined in the agreement. The
employment agreement terminated the consulting agreement, except for the
obligations of confidentiality and non-competition, which remained in force,
and the retention by Mr. Siegel of the stock options granted with the
consulting agreement. The employment agreement also contains independent
obligations of confidentiality, and prohibits Mr. Siegel from investing or
becoming employed by or associated with 50-Off Stores or actively soliciting
the employment or hiring of any Company personnel for a period of twenty-four
months following termination of the Agreement. The employment agreement
provides for a term ending February 1, 1999, a sign-on bonus of $100,000, an
annual base salary of $300,000, and a grant of options to purchase 75,000
shares of Company common stock.
In January 1995, the Bankruptcy Court authorized the Company to enter
into an employment agreement with David P. Dash. Pursuant to this agreement,
Mr. Dash became President of the Company. The agreement provided for a
three-year term ending February 1, 1998, a sign-on bonus of $25,000, and an
annual base salary of $250,000. Under the agreement, Mr. Dash was eligible for
up to 50% of his base salary paid as an additional annual bonus in accordance
with and subject to the terms of the Company's then existing bonus plan, with a
guaranteed first-year bonus of at least $62,500. Mr. Dash resigned from the
Company effective August 8, 1996. Under the terms of the agreement, Mr. Dash
may not compete with the Company nor actively solicit the employment of Company
personnel for a period of twelve to twenty-four months following termination of
the agreement, except under certain limited circumstances.
On July 8, 1996, the Company entered into a letter agreement with Ross
Bacon pursuant to which Mr. Bacon was offered (and subsequently accepted)
employment with the Company. Under the agreement, Mr. Bacon is eligible to
receive severance benefits equal to three (3) month's base salary if he is
terminated without "cause" (as defined in the agreement) during the first six
(6) months of his employment with the Company, and six (6) months' base salary
if he is terminated without cause after six months from beginning his
employment with the Company.
New Stock Option Plan
Pursuant to the terms of the Plan, all stock options outstanding on
the Effective Date were cancelled, and the Company's Incentive Stock Option
Plan and Performance Share Plan were also cancelled on the Effective Date. A
new Solo Serve Stock Incentive Plan (the "New Incentive Plan") became effective
on the Effective Date. The New Incentive Plan is intended to provide the Board
of Directors with flexibility to adapt the compensation of officers, key
employees, consultants and advisors of the Company (the "Eligible Persons") to
a changing business environment by allowing not only grants of stock options
("Options"), but also grants of stock appreciation rights ("SARs"), shares of
restricted stock ("Restricted Stock") and any other form of compensation that
the committee of the Board of Directors administering the New Incentive Plan
(the "Committee") determines is consistent with the purpose of the New
Incentive Plan. The Board of Directors has determined that the Committee shall
be the Stock Option Committee. The New Incentive Plan also provides the
Committee with flexibility in determining the terms and conditions under which
Options, SARs and Restricted Stock may be awarded.
25
<PAGE> 26
The Company, through the New Incentive Plan, seeks to motivate
officers, key employees, consultants and advisors and to attract highly
competent individuals whose judgment, initiative and continuing effort will
contribute to the success of the Company.
The complete text of the New Incentive Plan is incorporated by
reference to the Exhibits to this report. The following summary of the material
features of the New Incentive Plan does not purport to be complete, and is
qualified in its entirety by reference to the complete text of the New
Incentive Plan.
General
Subject to the adjustment provisions described below, the maximum
number of shares of Common Stock and Common Stock equivalents which may be made
subject to grants under the New Incentive Plan under all forms of awards is
500,000. The shares to be issued under the New Incentive Plan may be either
treasury shares or newly issued shares. Any shares subject to a grant under the
New Incentive Plan that lapse or are terminated or forfeited for any reason
prior to exercise may be made subject to subsequent grants under the New
Incentive Plan, provided that no monetary benefits of ownership therefrom, such
as dividends, were received by the former grantee.
The Committee that administers the New Incentive Plan consists of
members of the Board of Directors who are "disinterested persons" (as that term
is defined in the rules and regulations under Section 16 of the Securities
Exchange Act of 1934 (the "Exchange Act")) and "outside directors" (as that
term is defined in the proposed regulations to be promulgated under Section
162(m) of the Code, as may be modified or amended by the adopted regulations).
Within the limits of the New Incentive Plan, the Committee determines the
amounts, times, forms, terms and conditions of grants under the New Incentive
Plan. Participation in the New Incentive Plan is determined by the Committee
and is limited to officers, key employees, consultants and advisors. The cost
of administering the benefit payments under the New Incentive Plan shall be
borne solely by the Company. Generally, no member of the Board of Directors or
the Committee shall be liable for any action or determination taken or made
with respect to the New Incentive Plan. In addition, the Company will indemnify
the Board of Directors and the Committee against any claims, losses, demands,
causes of action or other expense, including reasonable expenses of counsel, in
connection with administration of the New Incentive Plan.
As a condition to any grant under the New Incentive Plan, each
participant must enter into an agreement containing such terms and conditions
relating to such grant as shall be determined by the Committee consistent with
the terms of the New Incentive Plan. In addition, the Committee may from time
to time establish procedures governing the administration of the New Incentive
Plan and terms and conditions related to the grant of awards under the New
Incentive Plan.
The Board of Directors may at any time amend, suspend, or terminate
the New Incentive Plan without stockholder approval or approval of
participants, except that (i) stockholder approval is required if any action
may increase the total number of shares of Common Stock subject to the New
Incentive Plan (other than pursuant to the adjustment provisions of the New
Incentive Plan) and (ii) as described below, the approval of participants is
required if certain modifications are to be made following an event effectively
constituting a Change in Control (as defined in the New Incentive Plan) of the
Company.
In the event that the outstanding shares of Common Stock are changed
into or exchanged for a different number or kind of shares or other securities
of the Company or another corporation by reason of merger, consolidation, other
reorganization, recapitalization, reclassification, combination of shares,
stock split-up, or stock dividend, the Committee shall make such adjustments,
if any, to outstanding grants and the New Incentive Plan as it deems
appropriate.
The New Incentive Plan contains a self-operative provision that
modifies any term of the New Incentive Plan that varies from or conflicts with
any applicable federal or state securities laws and regulations in effect from
time to time so that such term conforms to and complies with such laws.
26
<PAGE> 27
The New Incentive Plan permits the Committee to determine, at the time
of each grant, whether, when and how dividends (or dividend cash equivalents),
if any, shall be paid in respect of such grant.
The New Incentive Plan contains provisions to enable the Company to
satisfy its tax withholding obligations pursuant to such arrangements as are
satisfactory to the Committee. The Committee may permit participants to pay
such taxes through the tender of cash or securities or the withholding of the
Common Stock or cash to be received through grants or any other arrangement
satisfactory to the Committee.
Grants under the New Incentive Plan that are otherwise subject to
vesting over a period of time can, under certain circumstances, become fully
and immediately exercisable or can cease to be subject to applicable
restrictions upon certain events effectively constituting a Change of Control
of the Company (the date of which any such event occurs is referred to as a
"Trigger Date").
The New Incentive Plan also provides that upon the occurrence of a
Trigger Date, participants have a 90-day period during which they may settle
outstanding grants for cash. In the case of an award granted less than six
months prior to the Trigger Date to a participant subject to the restrictions
imposed under Section 16 (b) of the Exchange Act, the period during which
grants could be so settled would be from the Trigger Date until 90 days after
the end of the six-month period following the date such award was granted. Such
cash settlements would be made pursuant to provisions designed to give
participants the benefit of the higher of (i) the highest price paid or to be
paid for shares of the Common Stock in connection with the events related to
the occurrence of the Trigger Date and (ii) the highest market price for shares
of the Common Stock during the period beginning 90 days prior to the Trigger
Date and ending on the date a participant elects to exercise such cash
settlement right. Such cash settlement rights of a participant may be exercised
notwithstanding the termination of the participant's employment with the
Company.
Any termination or modification of the New Incentive Plan after a
Trigger Date may not adversely affect the cash settlement rights of a
participant in respect of such Trigger Date without such participant's consent.
The Committee may, prior to a Trigger Date, provide that such cash settlement
rights shall automatically be deemed exercised upon the occurrence of a Trigger
Date. The provision of such cash settlement rights in respect of grants under
the New Incentive Plan will not reduce the number of shares and share
equivalents available for grants under the New Incentive Plan.
The Change of Control provisions in the New Incentive Plan may cause a
possible merger, takeover of the Company, acquisition of control of the Company
by a principal stockholder or change in management to be more expensive than it
would be in the absence of such provisions. The Change of Control provisions do
not apply to a transaction between General Atlantic or an affiliate thereof and
the Company. The New Incentive Plan is not being proposed in response to any
present actions known to the Board of Directors. The Board of Directors
believes that on balance the New Incentive Plan will be of significant benefit
to the Company, its stockholders and its employees.
Options
The Committee has full and final authority to select those Eligible
Persons who will be granted Options. The Options granted under the New
Incentive Plan may be Incentive Stock Options ("ISOs"), as defined in Section
422 of the Code, or options not qualifying for treatment as ISOs ("Nonstatutory
Stock Options"). Subject to applicable provisions of the Code, the Committee
determines the recipients of Options and the terms of the Options, including
the number of shares for which an Option is granted, the term of the Option and
the time(s) when the Option can be exercised. Restrictions on the exercise of
an Option may at the discretion of the Committee be contained in the agreement
with the participant or in the Committee's procedures. Each ISO must comply
with all the requirements of Section 422 of the Code. The Committee may in its
discretion waive any condition or restriction on the exercise of an Option and
may accelerate the time at which any Option is exercisable.
27
<PAGE> 28
The price per share of the Common Stock subject to an Option (the
"Option Price") is set by the Committee. In the case of ISOs, the Option Price
may not be less than the fair market value of the Common Stock generally
determined to be the last sale price reflected on the Nasdaq National Market
System on the date of the grant of the ISOs (or, if not so quoted, the value
set by the Committee as the fair market value, at the Committee's sole
discretion); provided, however, the Option Price of an ISO granted to an
Eligible Person that owns 10% or more of the Common Stock may not be less than
110% of the fair market value of the Common Stock on the date of grant of the
ISOs. The Committee also determines the manner in which the Option Price of an
Option may be paid, which may include the tender of cash or securities or the
withholding of the Common Stock or cash to be received through grants or any
other arrangement satisfactory to the Committee.
Options are not transferable except by will or the laws of descent and
distribution.
SARs
The Committee has full and final authority to select those Eligible
Persons who will be granted SARs. In the discretion of the Committee, SARs may
be granted separately or in tandem with the grant of an Option. An SAR is a
grant entitling the participant to receive an amount in cash or shares of the
Common Stock or a combination thereof, as the Committee may determine, having a
value equal to (or if the Committee shall determine at the time of grant, less
than) the excess of (i) the fair market value on the date of exercise of the
shares of the Common Stock with respect to which the SAR is exercised over (ii)
the fair market value of such shares on the date of the grant (or over the
Option Price, if the SAR is granted in tandem with an Option).
An SAR granted in tandem with a Nonstatutory Stock Option may be
granted either at or after the time of the grant of the Nonstatutory Stock
Option. An SAR granted in tandem with an ISO may be granted only at the time of
the grant of the ISO. An SAR granted in tandem with a longer exercisable Option
terminates and is no longer exercisable upon the termination or exercise of the
related Option. Subject to the limitations set forth in the New Incentive Plan,
SARs shall be subject to such terms and conditions as shall be determined from
time to time by the Committee. The Committee at any time may accelerate the
exercisability of any SAR and otherwise waive or amend any conditions to the
grant of an SAR.
SARs are not transferable except by will or the laws of descent and
distribution.
Restricted Stock
The New Incentive Plan provides that the Committee will have
discretion to make awards of Restricted Stock to the Eligible Persons. A
Restricted Stock grant entitles the recipient to acquire, at no cost or for a
purchase price determined by the Committee on the date of the grant (as
determined by the Committee), shares of the Common Stock subject to such
restrictions and conditions as the Committee may determine at the time of the
grant. Upon (i) the grant of Restricted Stock (or upon payment of the purchase
price for Restricted Stock if a purchase price is required) and (ii) recording
of the Restricted Stock in the stock ledger of the Company, the recipient may
have all the rights of a stockholder with respect to the Restricted Stock,
including voting and dividend rights. A grant of Restricted Stock will be
subject to nontransferability restrictions, Company repurchase and forfeiture
provisions and such other conditions (including conditions on voting and
dividends) as the Committee shall impose at the time of grant. Shares of
Restricted Stock may not be transferred or otherwise disposed of except as
specifically provided for in the New Incentive Plan.
Upon the grant of a Restricted Stock award, the Committee shall
specify the conditions, if any, to be met in order for the restrictions on the
shares subject to the grant to lapse and/ or the date(s) when the restrictions
will lapse. Restrictions may include vesting restrictions based upon matters
such as timing, but could also relate to other matters. Subsequent to the lapse
of all restrictions on shares of Restricted Stock, such shares shall cease to
be Restricted Stock and shall be deemed "vested." The Committee may in its
discretion waive any condition or restriction related to a grant of Restricted
Stock or accelerate the date(s) on which a grant of Restricted Stock vests.
28
<PAGE> 29
In the event of termination of employment of a participant for any
reason prior to shares of Restricted Stock becoming vested, the Company has the
right, in the discretion of the Committee, to repurchase such unvested shares
at their purchase price, or to require forfeiture of such shares if acquired at
no cost.
Other Awards
In addition to Options, SARs and Restricted Stock, the New Incentive
Plan permits the Committee to grant awards to Eligible Persons consisting of
any other form of consideration that the Committee determines is consistent
with the purposes of the New Incentive Plan. The grant of additional types of
awards is subject to the overall limitation on the number of shares of the
Common Stock (or share equivalents) that may be granted under the New Incentive
Plan to participants under all forms of awards. Pursuant to such authority, the
Committee could grant awards to Eligible Persons such as restricted units,
phantom stock, performance awards, performance units, performance shares, stock
appreciation shares, limited stock appreciation rights, stock acquisition
rights, valuation protection rights, reload options or any other type of award
or combination or derivative of various types of awards. The form and terms of
any such additional types of awards, as well as the terms and conditions of the
grant of any such awards, will be determined by the Committee and set forth in
the agreements entered into with participants and in the Committee's
procedures. Such grants (including grants of Options, SARs and Restricted
Stock) may be settled at the discretion of the Committee in cash, shares of the
Common Stock or any combination thereof.
Federal Income Tax Consequences
Commencing in taxable years beginning on or after January 1, 1994, a
publicly held corporation may not, subject to limited exceptions, deduct for
federal income tax purposes certain compensation paid to an executive officer
who is the chief executive officer or one of the four other highest paid
executive officers in excess of $1 million in any taxable year (the "$1 Million
Cap"). In general, compensation received on account of the exercise of options
that were granted on or prior to February 17, 1993 will not be subject to the
$1 Million Cap. Also, certain other performance-based compensation may not be
subject to the $1 Million Cap. Compensation attributable to the exercise of
options and other awards granted after February 17, 1993, however, may be
counted in determining whether the $1 Million Cap has been exceeded in any
taxable year if such compensation does not qualify as performance-based
compensation. The Company believes that any Options and SARs to be granted
under the New Incentive Plan with an exercise price at or above the fair market
value of the Common Stock on the date of grant will qualify as
performance-based compensation and not be subject to the $1 Million Cap.
However, whether (i) the grant of Restricted Stock or any other types of awards
under the New Incentive Plan are subject to the $1 Million Cap, (ii) the $1
Million Cap with respect to such an executive will be exceeded and (iii) the
Company's deductions for compensation paid in excess of the $1 Million Cap will
be denied, will depend on the resolution of various factual and legal issues
that cannot be determined at this time.
Under the Code, a participant receiving a Nonstatutory Stock Option
generally does not realize taxable income upon the grant of the Option. A
participant does, however, realize ordinary income upon the exercise of a
Nonstatutory Stock Option to the extent that the fair market value of the
Common Stock on the date of exercise exceeds the Option Price. The Company may
deduct for federal income tax purposes (subject to the $1 Million Cap, if
applicable, and subject to satisfying the federal income tax withholding
requirements) an amount equal to the ordinary income so realized by the
participant. Upon the subsequent sale of the shares acquired pursuant to a
Nonstatutory Stock Option, any gain or loss will be capital gain or loss,
assuming the shares represent a capital asset in the hands of the participant.
There will be no tax consequences to the Company upon the subsequent sale of
shares acquired pursuant to a Nonqualified Stock Option.
The grant of an ISO does not result in taxable income to a
participant. The exercise of an ISO also does not result in taxable income,
provided that the employment requirements specified in the Code are satisfied,
although such exercise may give rise to alternative minimum taxable income for
the participant. In addition, if the participant does not dispose of the Common
Stock acquired upon exercise of an ISO during the statutory holding period,
then any gain or loss upon subsequent sale of the Common Stock will be a
long-term capital gain or loss, assuming the shares represent a capital asset
in the participant's hands.
29
<PAGE> 30
The statutory holding period for the Common Stock acquired pursuant to
the exercise of an ISO is the later of two years from the date the ISO is
granted or one year from the date the Common Stock is transferred to the
participant pursuant to the exercise of the ISO. If the employment and
statutory holding period requirements are satisfied, the Company may not claim
any federal income tax deduction upon either the exercise of the ISO or the
subsequent sale of the Common Stock received upon exercise of the ISO. If these
requirements are not satisfied, the amount of ordinary income taxable to the
participant is the lesser of
(i) the fair market value of the Common Stock on the date of exercise
minus the Option Price, or
(ii) the amount realized on disposition minus the Option Price. The
Company may deduct for federal income tax purposes (subject to the $1 Million
Cap, if applicable) an amount equal to the ordinary income so realized by the
participant.
A recipient does not realize taxable income upon the grant of an SAR
but realizes ordinary income upon its exercise to the extent of the fair market
value of the Common Stock subject to the SAR on the date of the exercise and
the Company may then deduct for federal income tax purposes (subject to the $1
Million Cap, if applicable, and subject to satisfying federal income tax
withholding requirements) an amount equal to the ordinary income realized by
the participant. Upon the subsequent sale of shares acquired pursuant to an
SAR, any gain or loss will be capital gain or loss, assuming the shares
represent a capital asset in the hands of the participant.
In general, a participant receiving Restricted Stock does not realize
taxable income on the grant of Restricted Stock. A participant will, however,
realize ordinary income when the Restricted Stock becomes vested to the extent
that the fair market value of the Common Stock on that date exceeds the price,
if any, paid for the Restricted Stock or, if no price were paid, to the extent
of the fair market value of the Common Stock on that date. However, the
participant may elect (within 30 days after the grant of Restricted Stock) to
realize taxable income on the date of the grant to the extent of the fair
market value of the Restricted Stock (determined without regard to restrictions
on transferability and any substantial risk of forfeiture). If such election is
made, the participant will not realize taxable income when the Restricted Stock
becomes vested. In addition, if such an election is made and the Restricted
Stock is subsequently forfeited, the participant is not entitled to a deduction
but will be allowed a capital loss, if any, equal to the amount paid for such
shares. Upon a subsequent sale of vested Restricted Stock, any gain or loss
will be capital gain or loss, assuming the shares represent a capital asset in
the hands of the participant. The Company may deduct for federal income tax
purposes (subject to the $1 Million Cap, if applicable, and subject to
satisfying federal income tax withholding requirements) an amount equal to the
ordinary income realized by the recipient of the Restricted Stock. Dividends
paid to the participant on Restricted Stock during the restricted period are
ordinary compensation income to the participant and deductible as such by the
Company (subject to the $1 Million Cap, if applicable).
If the exercisability of an Option or an SAR or the elimination of
restrictions on Restricted Stock is accelerated, or special cash settlement
rights are triggered and exercised, as a result of a Change in Control, all or
a portion of the value of the relevant award at that time may be deemed a
"parachute payment" for purposes of determining whether a 20% excise tax is
payable by the participant as a result of the receipt of an "excess parachute
payment" pursuant to Section 4999 of the Code. The Company will not be entitled
to a deduction for that portion of any parachute payment which is subject to
the excise tax.
30
<PAGE> 31
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Based upon information received from the persons concerned, each
person known to the Company to be the beneficial owner of more than five
percent of the outstanding shares of Common Stock of the Company, each
director, each of the named executive officers, and all directors and executive
officers of the Company as a group, owned beneficially as of April 30, 1997,
the number and percentage of outstanding shares of Common Stock of the Company
indicated in the following table. Except as noted below, each of the persons
listed has sole investment and voting power with respect to the shares
indicated and the address of each of the persons listed is c/o the Company.
BENEFICIAL OWNERSHIP(1)
<TABLE>
<CAPTION>
COMMON STOCK PREFERRED STOCK
NAME AND ADDRESS NUMBER PERCENTAGE NUMBER PERCENTAGE
OF BENEFICIAL OWNER OF SHARES OF CLASS OF SHARES OF CLASS
- ----------------------------------------------------------------- --------------------------
<S> <C> <C> <C> <C>
General Atlantic Corporation (2) 2,643,889 62.3% (2a) 1,388,889 100%
125 E. 56th Street
New York, NY 10022
- ----------------------------------------------------------------- --------------------------
Robert J. Grimm (3) 62,000 2.2% 0 0%
- ----------------------------------------------------------------- --------------------------
Stephen P. Reynolds (4) 12,000 ** 0 0%
- ----------------------------------------------------------------- --------------------------
John C. Seiler (5) 14,500 ** 0 0%
- ----------------------------------------------------------------- --------------------------
Walter H. Teninga (6) 12,000 ** 0 0%
- ----------------------------------------------------------------- --------------------------
David P. Dash (7) 0 0% 0 0%
- ----------------------------------------------------------------- --------------------------
Charles Siegel (8) 100,000 3.4% 0 0%
- ----------------------------------------------------------------- --------------------------
Ross Bacon (9) 15,000 ** 0 0%
- ----------------------------------------------------------------- --------------------------
All Executive Officers 215,500 7.1% 0 0%
and Directors as a group
(6 persons) (10)
- ----------------------------------------------------------------- --------------------------
</TABLE>
- -----------
** less than 1%
(1) Unless otherwise indicated, all shares are held directly with sole
voting and investment power. All options referenced are exercisable at a
price equal to or greater than $0.25 per share.
(2) General Atlantic Corporation ("GAC") is a Delaware corporation whose
principal business is holding and managing investments for its own
account. The shares directly owned by GAC are deemed to be beneficially
owned by GAC's direct and indirect controlling stockholders. GAC is,
through a number of intermediary holding companies, a wholly-owned
subsidiary of General Atlantic Group Limited, a Bermuda corporation,
whose principal business is holding and managing investments for its own
account. The address of General Atlantic Group Limited is Washington
Mall II, Church Street, Hamilton 5, Bermuda. General Atlantic Group
Limited is, through an intermediate holding company, a wholly-owned
subsidiary of The Atlantic Foundation, a Bermuda grant-making,
charitable corporation. The address of The Atlantic Foundation is P. O.
Box HM 666, Clarendon House, Church Street, Hamilton, HM CX, Bermuda. No
natural person beneficially owns the securities owned by The Atlantic
Foundation.
(2a) Includes 1,388,889 shares of Preferred Stock, which is convertible into
an equivalent number of shares of Common Stock of the Company, and votes
with the Common Stock.
(3) Includes 12,000 shares issuable upon exercise of stock options, and does
not include options to purchase 8,000 shares of Common Stock, none of
which are exercisable within 60 days.
(4) Includes 12,000 shares issuable upon exercise of stock options, and does
not include options to purchase 8,000 shares of Common Stock, none of
which are exercisable within 60 days.
(5) Includes 12,000 shares issuable upon exercise of stock options, and does
not include options to purchase 8,000 shares of Common Stock, none of
which are exercisable within 60 days.
(6) Includes 12,000 shares issuable upon exercise of stock options, and does
not include options to purchase 8,000 shares of Common Stock, none of
which are exercisable within 60 days.
(7) All of the options previously held by Mr. Dash expired unexercised prior
to Fiscal Year End 1996.
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<PAGE> 32
(8) Includes 100,000 shares issuable upon exercise of stock options.
(9) Includes 15,000 shares issuable upon exercise of stock options, and does
not include options to purchase 35,000 shares of Common Stock, none of
which are exercisable within 60 days.
(10) Includes 163,000 issuable upon exercise of stock options, and does not
include options to purchase 67,000 shares of Common Stock, none of which
are exercisable within 60 days.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Prior to the Initial Public Offering, the Company and General Atlantic
had been members of an affiliated group (the "Group") within the meaning of
Section 1504(a) of the Internal Revenue Code of 1986, as amended, and had been
filing consolidated income tax returns. General Atlantic was the common parent
of the Group. General Atlantic and the Company had entered into an agreement
regarding tax allocation providing for the allocation of taxes for the years
that they were members of the Group.
The Company and General Atlantic, on April 17, 1992, entered into an
agreement regarding tax consequences of deconsolidation, the primary purposes
of which are (i) to ensure adequate communication and cooperation between
General Atlantic and the Company after the closing of the Initial Public
Offering; (ii) to ensure that the Company will be entitled to any refund or
credit resulting from the carryback of a net operating loss or credit generated
in a taxable year or period beginning after the closing of the Initial Public
Offering; (iii) to provide that both General Atlantic and the Company will
agree to pay to the other party who suffers a tax detriment as a result of a
subsequent Internal Revenue Service audit adjustment any accompanying tax
benefit that such party may receive; (iv) to provide that General Atlantic will
indemnify the Company for any tax liability imposed upon (x) the Group (other
than the Company) for any taxable year or period, and (y) the Company or for
which the Company may be liable for any taxable year or period ending on or
before the closing of the Initial Public Offering; and (v) to provide that the
Company will indemnify General Atlantic for any tax liability of the Company
for any taxable year or period beginning after the closing of the Initial
Public Offering.
Under the terms of the Plan of Reorganization, the Company issued
1,388,889 shares of Preferred Stock to General Atlantic Corporation in
consideration of an aggregate purchase price of $2,500,000 on July 18, 1995.
The Preferred Stock is convertible into an equal number of shares of Common
Stock of the Company, votes with the Common Stock on a share-for-share basis,
and was not subject to reduction by the one-for-two reverse split effected in
connection with the Plan. The Company was informed that General Atlantic
Corporation used funds from working capital for the purchase price of the
Preferred Stock. On July 18, 1995, the Company amended its Certificate of
Incorporation to provide for the one-for-two reverse split of Common Stock and
to designate the Preferred Stock. After the reverse split, General Atlantic
Corporation held 1,255,000 shares of Common Stock and 1,388,889 shares of
Preferred Stock, which is approximately 62% of the voting securities of the
Company on the date of this report.
On June 20, 1995, the Company entered into a Loan and Security
Agreement with Congress Financial Corporation (Southwest) ("Congress") pursuant
to which Congress agreed to provide a revolving credit facility and letter of
credit accommodations in an amount up to the borrowing base as calculated
pursuant to the loan agreement, which may not exceed $15,000,000 (the "Credit
Facility"). The Credit Facility is secured by a first lien on substantially all
of the assets of the Company, including inventory and accounts receivable. The
availability of loans under the Credit Facility is determined by an advance
rate formula. In order to increase loan availability under the Credit Facility,
General Atlantic Corporation ("General Atlantic"), the Company's principal
stockholder, furnished to Congress a letter of credit in the amount of
$1,500,000 (the "GAC L/C") to serve as additional collateral for the Credit
Facility effective June 26, 1996. As consideration for General Atlantic's
agreement to provide the GAC L/C, the Company agreed to (a) pay General
Atlantic the sum of $100 per year, (b) reimburse General Atlantic for the
amount, if any, which it is required to reimburse to any issuing or confirming
bank which honors any drafts under the GAC L/C, (c) pay General Atlantic
interest on any amounts drawn under the GAC L/C at Chemical Bank's prime rate
plus one percent (1%), and (d) grant General Atlantic a second lien security
interest (behind Congress) on substantially all of the assets of the Company.
32
<PAGE> 33
The Company has retained the services of a commercial real estate
brokerage firm to seek out a buyer or buyers to purchase from and lease back to
the Company its owned properties. The wife of the Company's Executive Vice
President, Chief Operating and Financial Officer is one of the brokers assigned
to the listing. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Compensation Committee Interlocks and Insider Participation
Mr. Grimm, the Chairman of the Board and former President of the
Company, served on the Compensation Committee of the Board of Directors in
fiscal year 1995.
Pursuant to the terms of the Registration Rights Agreement by and
among the Company, General Atlantic Corporation, and Robert J. Grimm dated as
of March 6, 1992, the Company has granted certain registration rights to
General Atlantic and Mr. Grimm. Under the terms of the Registration Rights
Agreement, in the event that the Company proposes to register any of its
securities under the Securities Act for its own account, except in certain
circumstances, General Atlantic and Mr. Grimm are entitled to include shares of
Common Stock in such registration ("Piggyback Registration"), subject to the
right of the underwriters of any such offering to limit the number of shares
included in such registration. The Company has agreed to pay all expenses in
connection with a Piggyback Registration. General Atlantic has the additional
right to require ("Demand Registration") the Company to register shares of
Common Stock under the Securities Act at any time after the effective date of
the Initial Public Offering, and the Company is required to effect such
registration, subject to certain conditions and limitations. General Atlantic
is required to bear the expenses of each Demand Registration. General Atlantic
has the right to require the Company to effect three such Demand Registrations;
provided, however, that General Atlantic shall not be entitled to more than one
Demand Registration in any period of 180 days. The Company need not comply with
the Demand Registration if the fair market value of the shares of Common Stock
to be registered does not equal or exceed $5,000,000. To the Company's
knowledge, General Atlantic has no current plans to require a Demand
Registration. The Company has agreed to customary indemnities including an
agreement to indemnify, subject to certain limited exceptions, General Atlantic
and Mr. Grimm in connection with a Demand Registration and a Piggyback
Registration.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)1. Financial Statements
The following financial statements of the Company are included
following the Index to Consolidated Financial Statements and Schedule on page
F-1 of this Report.
Report of Independent Accountants
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Changes in Stockholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
(a)2. Financial Statement Schedule
33
<PAGE> 34
The following financial statement schedule is included following the
Index to Consolidated Financial Statements and Schedule on page F-1 of this
Report.
Report of Independent Accountants on Financial Statement Schedule
X. Supplementary Consolidated Statements of Operations Information
All other schedules have been omitted because they are not applicable,
not required under the instructions or the information requested is set forth
in the consolidated financial statements or related notes thereto.
34
<PAGE> 35
(a)3. Exhibits
The following Exhibits are incorporated by reference to the filing
indicated or are included following the Index to Exhibits:
Exhibit
Number Description of Exhibit
2.1 First Amended Plan of Reorganization of Solo Serve Corporation dated
May 17, 1995 (6)
2.2 Non-material Modifications to First Amended Plan of Reorganization
of Solo Serve Corporation, entered July 6, 1995 (6)
3.1 Restated Certificate of Incorporation of the Company (7)
3.2 Certificate of Designation of Rights and Preferences of Preferred
Stock (7)
3.3 Bylaws of the Company, as amended and restated *
4.1 Specimen Certificate for Common Stock of the Registrant
(representing shares of common stock of the Company after giving
effect to the previously reported 1-for-2 reverse split effected
July 18, 1995) (9)
10.1 Registration Rights Agreement among General Atlantic Corporation,
Robert J. Grimm and the Company (1)
10.2 Agreement Regarding Tax Consequences of Deconsolidation between the
Company and General Atlantic Corporation (1)
10.3 Tax Allocation Agreement between the Company and General Atlantic
Corporation (1)
10.4 Form of Indemnity Agreement between Directors, Executive Officers
and the Company (1)
10.5 Associate Stock Purchase Plan of the Company (2)
10.6 Retirement Savings Plan and Trust of the Company (2)
10.7 Mortgage Note A, dated November 20, 1992, in principal amount of
$4,940,000, with the Company as Maker and Nationwide Life Insurance
Company as Holder (2)
10.8 Mortgage Note B, dated November 20, 1992, in principal amount of
$1,000,000, with the Company as Maker and Employers Life Insurance
Company of Wausau as Holder (2)
10.9 Asset Purchase Agreement between the Company and Ross Stores, Inc.
(3)
10.10 Employment Agreement between the Company and David P. Dash (4)+
10.11 Employment Agreement between the Company and Robert J. Grimm, as
amended (5)+
10.12 Subscription Agreement between the Company and General Atlantic
Corporation (7)
10.13 Solo Serve Corporation 1995 Stock Incentive Plan (8) +
10.14 Solo Serve Corporation Director Stock Option Plan (8) +
10.15 Escrow Agreement, dated July 18, 1995, by and between Texas Commerce
Bank, National Association, Borrower, General Atlantic Corporation
and the Official Committee of Unsecured Creditors of Solo Serve
Corporation (7)
10.16 Loan and Security Agreement, dated as of June 20, 1995, by and
between Solo Serve Corporation and Congress Financial Corporation
(Southwest) (7)
10.17 Amended Loan and Security Agreement, dated July 18, 1995, by and
between Solo Serve Corporation and MetLife Capital Corporation (8)
10.18 Loan Modification Agreement, dated July 18, 1995, by and among Solo
Serve Corporation, Nationwide Life Insurance Company, and Employers
Life Insurance Company (8)
10.19 Promissory Note, dated July 31, 1995, in principal amount of
$5,565,000, with the Company as Maker, and Texas Commerce Bank
National Association as Holder (8)
10.20 Loan Modification Agreement, dated October 27, 1995, by and between
Solo Serve Corporation and Congress Financial Corporation
(Southwest) (9)
10.21 Employment Agreement between the Company and Timothy L. Grady (9) +
10.22 Employment Agreement between the Company and Janet Pollock (9) +
10.23 Consulting Services Agreement between the Company and Robert J.
Grimm (10) +
10.24 Second Amendment to Loan and Security Agreement, dated January 31,
1996, by and between Solo Serve Corporation and Congress Financial
Corporation (Southwest) (11)
10.25 Letter Agreement dated January 23, 1996 by and between the Company
and MetLife Capital Corporation modifying the Loan and Security
Agreement between the Company and MetLife Capital Corporation, as
amended on July 18, 1995 (11)
35
<PAGE> 36
10.26 Amendment No. 3 to Loan and Security Agreement by and between Solo
Serve Corporation and Congress Financial Corporation (Southwest)
dated June 26, 1996 (12)
10.27 Letter of Credit and Security Agreement between Solo Serve
Corporation and General Atlantic Corporation dated as of June 26,
1996 (12)
10.28 Intercreditor and Subordination Agreement between Congress Financial
Corporation (Southwest) and General Atlantic Corporation dated as of
June 26, 1996, as acknowledged and agreed to by Solo Serve
Corporation (12)
10.29 Consulting Agreement between the Company and Charles Siegel (13) +
10.30 Employment Agreement between the Company and Charles Siegel (13) +
10.31 Amendment No. 4 to Loan and Security Agreement by and between Solo
Serve Corporation and Congress Financial Corporation (Southwest)
dated as of September 1, 1996 (13)
10.32 Amendment No. 5 to Loan and Security Agreement by and between Solo
Serve Corporation and Congress Financial Corporation (Southwest)
dated as of March 31, 1997 *
10.33 Letter Agreement dated March 28, 1997 by and between the Company and
MetLife Capital Corporation modifying the Loan and Security
Agreement between the Company and MetLife Capital Corporation, as
amended on July 18, 1995 *
10.34 Letter Agreement dated July 8, 1996 by and between the Company and
Ross E. Bacon.*+
10.35 Amendment No. 6 to Loan and Security Agreement by and between Solo
Serve Corporation and Congress Financial Corporation (Southwest)
dated as of May 19, 1997.*
21.1 Subsidiaries of the Registrant *
23.1 Consent of Independent Accountants *
27 Financial Data Schedule *
- -----------------
* Filed herewith.
+ Management Compensatory Plan or Arrangement
(1) Incorporated by reference to the Exhibits to the Company's
Registration Statement on Form S-1 (No. 33- 46324), as filed
on March 11, 1992, and amended by Amendment No. 1, filed on
March 26, 1992, Amendment No. 2, filed on April 20, 1992, and
Amendment No. 3, filed on April 24, 1992.
(2) Incorporated by reference to the Exhibits to the Company's
Annual Report on Form 10-K for the Fiscal year ended January
30, 1993.
(3) Incorporated by reference to the Exhibits filed to the
Company's Quarterly Report on Form 10-Q for the Quarter ended
July 30, 1994.
(4) Incorporated by reference to the Exhibits filed to the
Company's Annual Report on Form 10-K for the Fiscal Year ended
January 28, 1995.
(5) Incorporated by reference to the Exhibits filed to the
Company's Quarterly Report on Form 10-Q for the Quarter ended
April 29, 1995.
(6) Incorporated by reference to the Exhibits filed to the
Company's Current Report on Form 8-K for July 6, 1995.
(7) Incorporated by reference to the Exhibits filed to the
Company's Current Report on Form 8-K for July 18, 1995.
(8) Incorporated by reference to the Exhibits filed to the
Company's Quarterly Report on Form 10-Q for the Quarter ended
July 29, 1995.
(9) Incorporated by reference to the Exhibits filed to the
Company's Quarterly Report on Form 10-Q for the Quarter ended
October 28, 1995.
(10) Incorporated by reference to the Exhibits filed to the
Company's Annual Report on Form 10-K for the Fiscal Year ended
February 3, 1996.
(11) Incorporated by reference to the Exhibits filed to the
Company's Current Report on Form 8-K for February 8, 1996.
(12) Incorporated by reference to the Exhibits filed to the
Company's Current Report on Form 8-K for July 2, 1996.
(13) Incorporated by reference to the Exhibits filed to the
Company's Quarterly Report on Form 10-Q for the Quarter ended
August 3, 1996.
(b) Reports on Form 8-K. No reports on Form 8-K were filed during
the last quarter of the period covered by this report.
36
<PAGE> 37
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
SOLO SERVE CORPORATION
By: /s/ Charles M. Siegel By: /s/ Ross E. Bacon
--------------------------------- -------------------------------
Charles M. Siegel Ross E. Bacon,
President and Chief Executive Vice President and
Executive Officer Chief Operating and Financial
Officer, Treasurer and Secretary
(Principal Financial and
Accounting Officer)
DATED: May 19, 1997
Pursuant to the requirements of the Securities and Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.
<TABLE>
<CAPTION>
Signature Name and Title Date
--------- -------------- ----
<S> <C> <C>
/s/ Charles M. Siegel President and Chief Executive May 19, 1997
- ---------------------------------- Officer, Director
Charles M. Siegel
/s/ Ross E. Bacon Executive Vice President and May 19, 1997
- ---------------------------------- Chief Operating and Financial
Ross E. Bacon Officer, Treasurer and
Secretary
(Principal Financial and
Accounting Officer)
/s/ Robert J. Grimm Chairman of the Board May 19, 1997
- ----------------------------------
Robert J. Grimm
/s/ Stephen P. Reynolds Director May 19, 1997
- ----------------------------------
Stephen P. Reynolds
/s/ John C. Seiler Director May 19, 1997
- ----------------------------------
John C. Seiler
/s/ Walter H. Teninga Director May 19, 1997
- ----------------------------------
Walter H. Teninga
</TABLE>
37
<PAGE> 38
SOLO SERVE CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
<TABLE>
<S> <C>
Report of Independent Accountants . . . . . . . . . . . . . . . . . . . . . . . . . . . . F2
Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F3
Consolidated Statements of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . F4
Consolidated Statements of Changes in Stockholders' Equity . . . . . . . . . . . . . . . F5
Consolidated Statements of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . . F6
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . F7
Consolidated Financial Statement Schedule
Report of Independent Accountants on Financial Statement Schedule . . . . . . . . . . . . S-1
Schedule X - Supplementary Consolidated Statements of Operations Information . . . . . S-2
</TABLE>
Schedules not included above have been omitted because they are not applicable
or the required information is shown in the consolidated financial statements
or related notes.
F-1
<PAGE> 39
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Solo Serve Corporation
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of changes in stockholders' equity and
of cash flows present fairly, in all material respects, the financial position
of Solo Serve Corporation and its subsidiary (the Company) at February 3, 1996
and February 1, 1997, and the results of their operations and their cash flows
for each of the three years in the period ended February 1, 1997, in conformity
with generally accepted accounting principles. These financial statements are
the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion expressed above.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As described in Note 1, the
Company's Plan of Reorganization was approved by creditors and shareholders and
confirmed by the United States Bankruptcy Court on July 6, 1995 and became
effective on July 18, 1995. The Company's recurring operating losses raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans in regard to future operations are also described in Note 1.
The consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
PRICE WATERHOUSE LLP
San Antonio, Texas
May 14, 1997
F-2
<PAGE> 40
SOLO SERVE CORPORATION
CONSOLIDATED BALANCE SHEETS
ITEM 1. Financial Statements
<TABLE>
<CAPTION>
ASSETS FEBRUARY 3, 1996 FEBRUARY 1, 1997
------------------------------------
<S> <C> <C>
Cash $ 771,527 $ 1,065,564
Inventory 14,210,180 11,107,938
Other current assets 2,273,630 988,469
------------------------------------
Total current assets 17,255,337 13,161,971
Property and equipment, net 15,634,267 12,935,322
Goodwill and service marks, less accumulated amortization
of $2,090,000 and $2,210,000 at February 3, 1996 and
February 1, 1997, respectively 410,000 290,000
Deferred income taxes, net of valuation allowance of $10,141,039 and
$12,022,873 at February 3, 1996 and February 1, 1997, respectively - -
------------------------------------
TOTAL ASSETS $ 33,299,604 $ 26,387,293
====================================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES NOT SUBJECT TO COMPROMISE:
CURRENT LIABILITIES:
Current portion of long-term debt $ 683,951 $ 770,602
Accounts payable 3,426,821 3,983,898
Accrued expenses 3,210,010 2,339,615
------------------------------------
Total current liabilities 7,320,782 7,094,115
Long-term debt 15,135,885 14,960,600
Postretirement benefit obligation 565,200 -
LIABILITIES SUBJECT TO COMPROMISE 460,612 -
------------------------------------
TOTAL LIABILITIES 23,482,479 22,054,715
------------------------------------
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value, 2,000,000 shares authorized,
1,388,869 shares issued and outstanding at February 3, 1996 and 13,889 13,889
February 1, 1997
Common stock, $.01 par value; 8,000,000 authorized, 2,856,126 issued
and outstanding at February 3, 1996 and February 1, 1997 28,562 28,562
Capital in excess of par value 24,410,290 24,410,290
Retained earnings (deficit) (14,635,616) (20,120,163)
------------------------------------
TOTAL STOCKHOLDERS' EQUITY 9,817,125 4,332,578
------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 33,299,604 $ 26,387,293
====================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE> 41
SOLO SERVE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED
JANUARY 28, 1995 FEBRUARY 3, 1996 FEBRUARY 1, 1997
----------------------------------------------------
<S> <C> <C> <C>
-----------------------------------------------
Number of weeks in fiscal year 52 53 52
-----------------------------------------------
Net Revenues $ 138,925,236 $109,823,364 $95,237,689
Cost of goods sold (including buying and distribution,
excluding depreciation shown below) 100,686,542 83,474,450 67,484,703
-----------------------------------------------
Gross Profit 38,238,694 26,348,914 27,752,986
Selling, general, and administrative expenses 39,013,103 29,620,266 28,203,345
Depreciation and amortization 3,748,006 2,815,024 2,420,868
Write down of property and equipment - - 525,000
Non-recurring charge - - 464,000
-----------------------------------------------
Operating Loss (4,522,415) (6,086,376) (3,860,227)
Interest expense, (contractual interest of $1,821,075 and
$1,791,412 for the 52 weeks ended January 28, 1995 and 53
weeks ended February 3, 1996, respectively) 1,090,164 1,129,346 1,624,320
-----------------------------------------------
Loss before reorganization items, income taxes and
extraordinary item (5,612,579) (7,215,722) ( 5,484,547)
-----------------------------------------------
Reorganization Items:
Loss on disposal of stores 3,301,234 553,222 -
Loss on write-off of capitalized merchandising software 1,000,154 - -
Provision for other reorganization expenses 2,161,254 1,421,754 -
Interest earned on accumulated cash resulting from
Chapter 11 proceedings (200,222) (188,283) -
-----------------------------------------------
6,262,420 1,786,693 -
-----------------------------------------------
Loss before income taxes and extraordinary item (11,874,999) (9,002,415) (5,484,547)
-----------------------------------------------
Provision for (benefit from) income taxes:
Current - - -
Deferred 3,661,480 (1,418,200) -
-----------------------------------------------
3,661,480 (1,418,200) -
-----------------------------------------------
Loss before extraordinary item (15,536,479) (7,584,215) (5,484,547)
Extraordinary item: gain on discharge of debt (net of tax
effect of $1,418,200) - 2,752,975 -
Net Loss ($15,536,479) ($4,831,240) ($5,484,547)
===============================================
Loss per common share before extraordinary item ($5.45) ($2.10) ($1.92)
===============================================
Extraordinary gain per common share - $0.76 -
===============================================
Net Loss per common share ($5.45) ($1.34) ($1.92)
===============================================
Weighted average common shares outstanding 2,849,867 3,604,853 2,856,126
===============================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 42
SOLO SERVE CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Preferred Common Stock
Preferred Stock Common Stock Preferred Common Stock Stock Capital Capital in
Shares Shares Stock $.01 $.01 par in Excess of Excess of Par
Outstanding Outstanding par value value par value Value
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 29, 1994 5,652,452 $ 56,525 $ 21,783,792
Proceeds from issuance of common stock on
the exercise of stock options (Note 9) 59,800 598 111,826
Net Loss
------------------------------------------------------------------------------------
Balance at January 28, 1995 5,712,252 57,123 21,895,618
------------------------------------------------------------------------------------
Proceeds from issuance of preferred stock 1,388,889 $ 13,889 $ 2,486,111
Common stock one-for-two reverse split (2,856,126) (28,561) 28,561
Net Loss
------------------------------------------------------------------------------------
Balance at February 3, 1996 1,388,889 2,856,126 13,889 28,562 2,486,111 21,924,179
------------------------------------------------------------------------------------
Net Loss
------------------------------------------------------------------------------------
Balance at February 1, 1997 1,388,889 2,856,126 $ 13,889 $ 28,562 $ 2,486,111 $ 21,924,179
====================================================================================
<CAPTION>
Retained
Earnings
(Deficit) Total
---------------------------
<S> <C> <C>
Balance at January 29, 1994 $ 5,732,103 $27,572,420
Proceeds from issuance of common stock on
the exercise of stock options (Note 9) 112,424
Net Loss (15,536,479) (15,536,479)
---------------------------
Balance at January 28, 1995 (9,804,376) 12,148,365
---------------------------
Proceeds from issuance of preferred stock 2,500,000
Common stock one-for-two reverse split -
Net Loss (4,831,240) (4,831,240)
---------------------------
Balance at February 3, 1996 (14,635,616) 9,817,125
---------------------------
Net Loss (5,484,547) (5,484,547)
---------------------------
Balance at February 1, 1997 ($20,120,163) $ 4,332,578
===========================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 43
SOLO SERVE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED
JANUARY 28, 1995 FEBRUARY 3, 1996 FEBRUARY 1, 1997
------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (Loss) $ (15,536,479) $ (4,831,239) $ (5,484,547)
Gain on discharge of debt - 2,752,975 -
-----------------------------------------------------
Loss before gain on discharge of debt (15,536,479) (7,584,214) (5,484,547)
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO CASH
Depreciation and amortization 3,748,006 2,815,024 2,420,868
Loss on retirement and write down of leasehold improvements
and property and equipment 78,087 208,070 652,573
Changes in assets and liabilities
(Increase) Decrease in inventories 7,965,791 738,648 3,102,242
(Increase) Decrease in other current assets 2,843,290 181,519 1,285,161
(Increase) Decrease in non-current receivables (1,662,935) 1,662,935 -
Decrease (Increase) in long-term deferred income taxes 1,770,270 (1,418,200) -
Increase (Decrease) in accounts payable 7,217,744 (1,652,125) 557,077
(Decrease) Increase in accrued expenses (1,694,563) (606,607) (870,395)
(Decrease) Increase in long-term postretirement benefit obligation 116,200 63,900 (565,200)
-----------------------------------------------------
Total adjustments 20,381,890 1,993,164 6,582,326
-----------------------------------------------------
Net cash provided (used) by operating activities before
reorganization items 4,845,411 (5,591,050) 1,097,779
OPERATING CASH FLOWS FROM REORGANIZATION ITEMS:
Payments made on reorganization costs (748,965) (1,185,823) -
Non cash items from reorganization - (1,132,424) (460,612)
Loss on disposal of stores 3,301,234 553,222 -
Write-off of capitalized merchandising software 1,000,154 - -
Provision for other reorganization expenses 1,898,055 257,139 -
-----------------------------------------------------
Net cash provided (used) by operating activities 10,295,889 (7,098,936) 637,167
-----------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (1,257,783) (877,402) (254,494)
-----------------------------------------------------
Net cash provided (used) by investing activities before
reorganization items (1,257,783) (877,402) (254,494)
INVESTING CASH FLOWS FROM REORGANIZATION ITEMS:
Proceeds from sale of property and equipment 2,000,000 - -
-----------------------------------------------------
Net cash provided (used) by investing activities 742,217 (877,402) (254,494)
-----------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under line of credit agreement 18,635,466 25,067,240 103,367,509
Payments under line of credit agreement (13,585,529) (21,507,240) (102,747,509)
Borrowings under long-term debt agreement 5,000 - -
Payments under long-term debt agreement (635,373) (462,515) (708,636)
Proceeds from issuance of common stock on exercise of stock options 112,424 - -
-----------------------------------------------------
Net cash provided by finance activities before reorganization items 4,531,988 3,097,485 (88,636)
FINANCING CASH FLOWS FROM REORGANIZATION ITEMS:
Distributions to claimants under plan of reorganization - (13,933,177) -
Sale of preferred stock - 2,500,000 -
Provision for Debtor-In-Possession financing 263,199 - -
-----------------------------------------------------
Net cash provided by financing activities 4,795,187 (8,335,692) (88,636)
-----------------------------------------------------
Net increase (decrease) in cash 15,833,293 (16,312,030) 294,037
Cash at beginning of year 1,250,264 17,083,557 771,527
-----------------------------------------------------
Cash at end of year $ 17,083,557 $ 771,527 $ 1,065,564
=====================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid (received) during the period for:
Interest $ 973,735 $ 1,116,300 $ 1,579,691
Income tax $ (1,344,345) - -
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE> 44
SOLO SERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND BUSINESS OF THE
COMPANY:
BUSINESS
Solo Serve Corporation ("the Company") was incorporated in the State
of Texas on June 1, 1979 and was a majority-owned subsidiary of General
Atlantic Corporation ("GAC") until its initial public offering of shares of
common stock on April 29, 1992. The Company was reincorporated in Delaware in
December 1991. The Company is engaged in the operation of off-price retail
department stores located in Texas, Louisiana and Alabama. The Company has a
52/53 week fiscal year ending on the Saturday closest to January 31.
REORGANIZATION AND MANAGEMENT'S PLANS
On July 21, 1994 (the "Petition Date"), the Company filed a petition
(the "Filing") under Chapter 11 of the Bankruptcy Code ("Chapter 11") in the
United States Bankruptcy Court for the Western District of Texas (the
"Bankruptcy Court"). On July 6, 1995, the Bankruptcy Court approved a Proposed
Plan of Reorganization (the "Plan") jointly sponsored by the Official Committee
of Unsecured Creditors and Texas Commerce Bank San Antonio, N.A. ("TCB"), which
became effective on July 18, 1995. Under the Plan, the Unsecured Creditors
agreed to a distribution of 72.5% of pre- petition unsecured allowed claims.
The total amount of pre-petition unsecured allowed claims was $15.6 million.
Additionally, the Plan allowed for cash distributions for certain secured and
priority claims which totaled $2.2 million. On the effective date of the Plan,
the Company issued 1,388,889 shares of convertible Preferred Stock for an
aggregate consideration of $2.5 million. All of the Preferred Stock was
purchased by the Company's largest stockholder. On July 31, 1995, the Company
disbursed $10.2 million to its creditors in accordance with the First
Distribution as proposed by the Plan. The second and final distribution, which
occurred on December 20, 1995, was approximately $3.5 million. The second
distribution was financed in part by $2.5 million of funds in escrow which were
the proceeds from the sale of the Company's Preferred Stock. On April 17,
1996, the Bankruptcy Court entered the Final Decree, which administratively
closed Solo Serve Chapter 11 bankruptcy case. As of February 1, 1997 the
Company has settled all known claims.
Pursuant to the Plan the Company's existing common stock was subject
to a one-for-two reverse split. The Preferred Stock issued in connection with
the Plan has a liquidation value of $1.80 per share, is convertible to an equal
number of common shares, has voting rights on an as converted basis, and pays
no preferential dividends. With the issuance of Preferred Stock mentioned
above, GAC has increased its percentage ownership of the voting shares of the
Company to approximately 62% from its pre-reorganization interest of
approximately 44%.
The settlement of the Company's pre-petition liabilities reduced the
Company's net operating loss carryforwards and other tax credit carryforwards
by approximately $4.2 million. The above mentioned equity infusion by GAC has
not caused an ownership change that would limit the future utilization of the
Company's remaining net operating loss carryforwards and other tax credit
carryforwards. However, future ownership changes could result in such
limitations.
Since the effective date of the Plan, the Company has continued to
experience lower than anticipated sales and continuing operating losses. The
Company's business has been affected by a number of factors, including
increased competition in its principal markets, weakness in the apparel
industry, unfavorable economic conditions in certain markets and other factors,
many of which are not within the Company's control. The Company continues to
experience increased competitive pressure on both price points and market
share. Increased competitive pricing and promotional strategies have put
significant downward pressure on price points, and competitors have opened
additional store locations in the Company's principal markets.
During the second quarter of Fiscal 1996, the Company experienced a
number of executive management changes. The new management group has
implemented a strategy designed to (i) achieve a higher gross margin percentage
at reduced sales levels, (ii) reduce administrative costs to levels consistent
with planned operating levels, (iii) improve the brand quality of the inventory
mix and (iv) reduce inventory levels.
Through the end of Fiscal 1996, the Company has experienced a
reduction in inventory levels and administrative costs. While management plans
to continue the implementation of its new strategy in Fiscal 1997, there is no
assurance its efforts can overcome the competitive factors discussed above.
F-7
<PAGE> 45
SOLO SERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND BUSINESS OF THE
COMPANY: (CONTINUED)
ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. The most
significant accounting principles used are described below.
CONSOLIDATION
The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiary. All significant intercompany accounts
and transactions have been eliminated.
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is
determined by the specific identification method. The cost effects of
permanent retail reductions for slow moving items are charged to cost of goods
sold in the period such reductions are incurred.
DEPRECIATION AND AMORTIZATION
Depreciation of property and equipment is computed using the
straight-line method over estimated useful lives of the related assets.
Maintenance and repairs are expensed as incurred. Costs allocated to goodwill
and service marks are amortized over estimated lives of 20 and 16 years,
respectively, on a straight-line basis.
INCOME TAXES
Deferred income taxes are provided to reflect temporary differences
between the tax and book bases of assets and liabilities. The Company provides
valuation allowances for its deferred tax assets pursuant to the provisions of
Statement of Financial Accounting Standards No. 109.
PRE-OPENING EXPENSES
Pre-opening expenses are charged to income within the fiscal year in
which they are incurred.
LAYAWAY SALES
Layaway sales are recognized in full when the layaway deposit is
received, and the unpaid balance is recorded as accounts receivable.
Cancelations result in a decrease in recorded sales and cost of sales.
Cancelation fees and service fees required to place a purchase in layaway are
recognized as revenue.
RENTAL EXPENSE
Rental expense for leases with escalation clauses is recorded on a
straight-line basis.
EARNINGS PER SHARE
The computation of earnings per share is based on the weighted average
number of common shares outstanding and dilutive common stock equivalents
(stock options and voting, convertible preferred stock) outstanding during each
period (Note 9). Weighted average common shares outstanding and the related
per share amounts of the results of operations for the year ended January 28,
1995 have been retroactively restated to give effect to the one-for-two reverse
stock split that occurred during the year ended February 3, 1996.
F-8
<PAGE> 46
SOLO SERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 2 - OTHER CURRENT ASSETS:
Other current assets are comprised of:
<TABLE>
<CAPTION>
FEBRUARY 3, 1996 FEBRUARY 1, 1997
----------------------------------
<S> <C> <C>
Accounts receivable $ 399,808 $ 344,856
Advance payments to factors 935,579 -
Supplies 310,454 225,011
Other 627,789 418,602
----------------------------------
$ 2,273,630 $ 988,469
==================================
</TABLE>
Subsequent to emergence from Chapter 11, the Company made advance
payments to certain factors totaling $935,579 at February 3, 1996. These
advances were applied to inventory purchases during 1996.
NOTE 3 - PROPERTY AND EQUIPMENT:
Property and equipment stated at cost is comprised of:
<TABLE>
<CAPTION>
YEARS OF USEFUL LIFE FEBRUARY 3, 1996 FEBRUARY 1, 1997
-------------------- -------------------------------------
<S> <C> <C> <C>
Land $ 2,006,031 $ 2,006,031
Furniture, fixtures and equipment 3-10 19,040,779 17,306,704
Leasehold improvements 10-15 5,764,178 4,541,925
Buildings 20-40 8,683,897 8,683,897
-------------------------------------
35,494,885 32,538,557
Less accumulated depreciation 19,860,618 19,603,235
-------------------------------------
$ 15,634,267 $ 12,935,322
=====================================
</TABLE>
During July 1994, in conjunction with the reorganization, the Company
agreed to sell its eight stores in Houston, Texas, including the facility
leases, to another retailer. The Company also decided to close its eight
stores operating under the name of Half & More and its Solo Serve store in
Waco, Texas. These transactions were completed in August 1994. The
accompanying consolidated financial statements include a fiscal year 1994
charge of approximately $3.3 million in net leasehold and other asset
write-offs, inventory adjustments, employee costs and lease terminations
related to the sold and closed stores. In addition, the Company chose to
discontinue its implementation of a fully integrated merchandising software
package due to vendor delays and increased costs and recorded a nonrecurring
charge of approximately $1.0 million for the capitalized value of the system.
During the second quarter of 1995, the Company closed its Solo Serve store in
Montgomery, Alabama and recorded a loss on the disposal of approximately
$550,000. During July, 1996, the Company closed one of its Solo Serve stores
in Austin, Texas and recorded a loss on the disposal of approximately $68,000.
During the second quarter of fiscal 1997, the Company plans to close
one store and is finalizing plans to either close or operate in some reduced
capacity, two additional stores. Based on the revised cash flow estimates from
these locations, the Company wrote down the non-recoverable net book value
($525 thousand) of leasehold improvements and fixtures and equipment associated
with the locations in accordance with FAS 121.
F-9
<PAGE> 47
SOLO SERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 4- ACCRUED EXPENSES:
Accrued expenses are comprised of:
<TABLE>
<CAPTION>
FEBRUARY 3, 1996 FEBRUARY 1, 1997
--------------------------------------
<S> <C> <C>
Accrued rent $ 1,033,637 $ 756,471
Accrued sales and property taxes 937,041 534,612
Accrued state taxes 33,790 31,826
Voluntary benefits 142,000 217,078
Employee benefits 108,767 372,213
Incentive compensation 100,000 20,390
Layaway escrow 105,417 21,621
Other 749,358 385,404
--------------------------------------
$ 3,210,010 $ 2,339,615
======================================
</TABLE>
NOTE 5 - LIABILITIES SUBJECT TO COMPROMISE AND CONTINGENCIES RESULTING FROM THE
BANKRUPTCY PROCEEDING:
As of February 3, 1996, the Company had "Contested Claims" of
approximately $461,000. The Company filed objections to these claims in the
Bankruptcy Court, and these claims were all ultimately settled in the first
quarter of fiscal 1996.
NOTE 6 - LONG-TERM DEBT:
Long-term debt consists of the following:
<TABLE>
<CAPTION>
FEBRUARY 3, 1996 FEBRUARY 1, 1997
-------------------------------------
<S> <C> <C>
Notes payable to bank, interest at prime plus 1/2% (8.75% at
February 1, 1997) secured by properties $ 5,437,572 $ 5,131,406
Note payable to insurance company, interest at 8%; secured by
equipment and properties 1,006,861 654,132
Mortgage notes payable to insurance companies, interest at 9.5%;
secured by the distribution center 5,810,403 5,760,664
Congress Loan Agreement, interest at prime plus 1% (9.25% at
February 1, 1997); secured primarily by inventory
3,565,000 4,185,000
-------------------------------------
15,819,836 15,731,202
Less current portion 683,951 770,602
-------------------------------------
Long-term portion $ 15,135,885 $ 14,960,600
=====================================
</TABLE>
As part of its Plan of Reorganization, the Company restructured its
pre-petition secured indebtedness. Under the Plan, the Company assumed a $5.8
million mortgage note, secured by the Company's corporate office and
distribution center in San Antonio, Texas. The mortgage note carries an
interest rate of 9.5% per annum and requires monthly payments of principal and
interest of $49,773 until December 2002, when the balance is due. The Company
also modified and assumed a note payable to MetLife Capital Corporation
("MetLife"), which is secured by various equipment and fixtures located at the
corporate office and certain stores. The MetLife note carries an interest rate
of 8.0% and requires equal monthly payments, including principal and interest,
of $35,044 until September 1998, when the balance is due. The Company also
entered into a term note payable to TCB which carries an interest rate of prime
plus one-half percent and is due in equal monthly installments of principal and
interest of $64,117 until January 1999, when the balance is due.
F-10
<PAGE> 48
SOLO SERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 6 - LONG-TERM DEBT: (CONTINUED)
Prior to the effective date of the Plan, in accordance with Statement of
Position 90-7 (SOP 90-7), "Financial Reporting by Entities in Reorganization
Under the Bankruptcy Code," the Company did not accrue interest on those
obligations for which the amount of pre-petition debt exceeded the value of the
related collateral. Contractual interest is the amount that would have accrued
on the entire obligation. The Company continued to accrue interest on its
mortgage notes related to its distribution center.
The Company entered into a loan agreement with Congress Financial Corporation
(Southwest) ("Congress") on June 20, 1995, which became effective on the
effective date of the Plan. Under the terms of the loan agreement, which is in
effect until July 1999, the Company may borrow up to its borrowing base as
calculated pursuant to the loan agreement, which may not exceed $15.0 million.
The proceeds of the loan may be used for letters of credit, working capital,
and general corporate purposes. The loan as amended is a revolving loan with a
borrowing base formula which limits the amount of available credit to 60% of
the Company's eligible inventory during the period of March 1st through May
15th and September 1st through November 30th of each year and to 55% of the
Company's eligible inventory during any other period less (i) a percentage of
undrawn amounts on letters of credit and (ii) availability reserves established
from time to time by the lender. The loan bears interest at prime plus 1%. In
addition, the Company pays a commitment fee equal to 1/2% per annum of the
amount of the unused facility. The loan is secured by substantially all the
assets of the Company other than those subject to other existing liens.
In May, 1997, the Company and Congress amended certain financial
covenants in the loan agreement. Effective for the remaining term of the note
the Company shall maintain minimum working capital of $3.25 million, minimum
net worth of $800 thousand, and shall limit capital expenditures, net of
insurance or other proceeds resulting from the disposal or sale of fixed
assets, to $2.5 million for any fiscal year period.
Under the loan agreement, Congress may establish and revise
availability reserves in its sole discretion to cover risks or events it
perceives may affect its security under the loan or the business or prospects
of the Company. The current availability reserve under the loan agreement
approximates $660,000. As a result of the formula by which the borrowing base
is calculated, an increase in availability reserves restricts the Company's
access to borrowings under the credit facility. At February 1, 1997, the
Company had approximately $2.1 million available to borrow on the line.
Future maturities of long-term debt by fiscal year are as follows:
<TABLE>
<CAPTION>
Fiscal
------
<S> <C>
1997 770,602
1998 5,129,641
1999 4,250,986
2000 72,507
2001 79,671
Thereafter 5,427,795
------------
$ 15,731,202
============
</TABLE>
Based on borrowing rates currently available to the Company for bank
loans with similar terms and maturities, the fair value of long-term debt is
estimated to be $15.9 million at February 1, 1997, including amounts payable
within one year.
F-11
<PAGE> 49
SOLO SERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 7- NON-RECURRING CHARGE
The Company recognized and recorded an unanticipated and non-recurring charge
of $464 thousand in January 1997 which related to fiscal 1996. In recent
years, the Company self-insured workers' compensation and medical insurance for
its employees and purchased stop-loss coverage to limit its maximum exposure.
In late fiscal 1996, a dependent of one of the Company's former employees who
is covered by COBRA required expensive medical treatment which was not covered
by the stop-loss provider, and the majority of this accrual relates to this
claim. The Company's stop-loss providers have denied coverage for these
claims, and the Company has accrued management's best estimate of the Company's
maximum exposure. Management also believes that it is possible that some of
these costs may be recovered from the stop-loss provider. Effective January 1,
1997, the Company purchased fully insured coverage for medical and workers'
compensation insurance.
NOTE 8 - INCOME TAXES
The principal reasons for the difference between the statutory federal
income tax rate and the Company's provision for income taxes were:
<TABLE>
<CAPTION>
FISCAL 1994 FISCAL 1995 FISCAL 1996
--------------------------------------------
<S> <C> <C> <C>
Tax benefit at statutory federal rate $ (4,037,500) $ (1,642,307) $ (1,864,746)
Tax credits - - -
Nondeductible bankruptcy related expenses and
other, net (26,342) 573,952 47,175
Increase in state net operating loss
carryovers (492,264) (241,099) (64,263)
Valuation allowance for net deferred asset 8,217,586 1,309,454 1,881,834
--------------------------------------------
$ 3,661,480 $ 0 $ 0
--------------------------------------------
</TABLE>
The approximate tax effect of temporary differences that give rise to
deferred tax assets (liabilities) is as follows:
<TABLE>
<CAPTION>
FEBRUARY 3, 1996 FEBRUARY 1, 1997
----------------------------------------
<S> <C> <C>
Markdowns $ 228,495 $ 276,239
Uniform inventory capitalization 388,746 343,710
Voluntary benefits accrual 48,280 73,807
Medical benefits accrual 36,981 126,552
Accrued rent 351,436 257,199
Layaway sales (20,164) (22,782)
Difference in book and tax basis of property
and equipment 1,411,791 1,780,172
Postretirement benefit obligation 192,168 -
Net operating loss carryover 6,393,842 8,015,698
General business credit carryover (expiring
during the years 1996-2000) 356,638 356,638
Alternative minimum tax carryover 100,131 100,131
State net operating loss carryover 733,363 797,626
Other, net (80,668) (82,117)
Valuation allowance (10,141,039) (12,022,873)
----------------------------------------
$ 0 $ 0
========================================
</TABLE>
Due to the increased operating loss carryforwards generated from the
Company's continuing operations and reorganization, management believes that
uncertainties exist such that it is unlikely that the Company's deferred tax
assets will be realized in the future and therefore have recorded a valuation
allowance equal to 100% of its existing net deferred tax asset. In fiscal
1994, in accordance with SFAS 109, the Company recorded a net $3.7 million
deferred tax charge to fully reserve its $1.8 and $1.9 million current and
deferred tax assets, respectively. In fiscal 1995 and 1996, the Company
recorded an additional valuation allowance of $1,309,454 and $1,881,834,
respectively for deferred tax assets generated in those years. The Company's
net operating loss carryforward of approximately $23.7 million expires in the
years 2008-2011.
F-12
<PAGE> 50
SOLO SERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 9- STOCK OPTION PLAN:
In fiscal 1988, the Company established a stock option plan for certain key
employees. The following table summarizes option activity for fiscal years
1994, 1995,and 1996:
<TABLE>
<CAPTION>
Weighted
Average
Exercise
Stock Options Shares Price
- -------------
<S> <C> <C>
Outstanding January 29, 1994 605,900 $ 5.08
- ----------------------------
Granted 160,000 1.12
Canceled (247,320) 6.08
Exercised (59,800) 1.88
----------
Outstanding January 28, 1995 458,780 3.50
Granted 460,000 1.61
Canceled (468,780) 3.46
Exercised - -
----------
Outstanding February 3, 1996 450,000 1.61
Granted 281,000 .28
Canceled (370,000) 1.50
Exercised - -
----------
Outstanding February 1, 1997 361,000 $ 0.69
==========
</TABLE>
At January 28, 1995, February 3, 1996 and February 1, 1997, exercisable stock
options totaled 188,156, 56,799 and 176,500, shares and had weighted average
exercise prices of $3.50, $1.61, and $0.69, respectively.
The weighted average fair value of options granted during the two years ended
February 3, 1996 and February 1, 1997 was $1.61 and $0.28, respectively.
On the effective date of the Plan of Reorganization, all existing stock options
were canceled. A new Stock Incentive Plan was implemented on the Effective
Date. The new plan provides for 500,000 shares to be available for grant after
taking into effect the one-for-two reverse split. The 370,000 shares granted
on August 8, 1995 were canceled during 1996, and were replaced by options to
purchase 10,000, 25,000, 20,000, 75,000 and 151,000 shares at exercise prices
of $.375, $.375, $.4375, $.25 and $.25, respectively. These options are
exercisable as follows: 176,500 in 1996; 76,834 in 1997; 24,333 in 1998 and
3,333 in 1999. On September 1, 1995 options to purchase 80,000 shares at an
exercisable price of $2.125 per share were granted to Directors. The
Directors' options are exercisable as follows: 48,000 in 1996; 16,000 in 1997
and 16,000 in 1998. All options are exercisable for 10 years from the date of
issuance, with the exception of options for 25,000 shares, which are exercisable
for five years. The average remaining contractual life of these options is nine
years.
The Company applies APB Opinion No. 25, "Accounting for Stock Issued to
Employees" and related interpretations in accounting for its stock option plans
as allowed under FAS Statement No. 123, "Accounting for Stock-Based
Compensation". Accordingly, the Company has not recognized compensation
expense for its stock options granted subsequent to December 15, 1994, the
effective date of the statement. Had compensation expense for the Company's
stock options granted in fiscal 1996 and fiscal 1995 been determined based on
the fair value at the grant dates consistent with the methodology of FAS No.
123, such compensation expense would have been $85,106 and $151,045 in fiscal
1995 and 1996, respectively, and pro forma net loss and loss per share would
have been as follows:
F-13
<PAGE> 51
SOLO SERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 9- STOCK OPTION PLAN: (CONTINUED)
<TABLE>
<CAPTION>
FISCAL
1995 1996
---- ----
<S> <C> <C>
Pro forma net loss $(4,916,346) $(5,635,592)
Pro forma net loss per share (1.36) (1.97)
</TABLE>
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The fair value for
these options was estimated at the date of grant using a Black-Scholes option
pricing model with the following weighted-average assumptions:
<TABLE>
<CAPTION>
YEAR ENDED
-----------
FEBRUARY 3, 1996 FEBRUARY 1, 1997
---------------- ----------------
<S> <C> <C>
Assumptions used in determining the fair value of options granted:
Expected volatility 2.63 2.63
Expected dividend yield - -
Expected life (term) 6 years 6 years
Risk-free interest rate 5.29% 5.40%
</TABLE>
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, options valuation models require the input of
highly subjective assumptions including expected stock price volatility.
Because the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
measure of the fair value of its employees' stock options.
NOTE 10- RETIREMENT SAVINGS PLAN AND TRUST:
The Company adopted the Solo Serve 401(k) Retirement Savings Plan and
Trust effective January 1, 1993. Participation in the Retirement Savings Plan
is offered to eligible employees of the Company. Generally, all employees of
the Company who are 21 years of age and who have six months of service are
eligible for participation in the plan.
The Retirement Savings Plan is a defined contribution plan which
provides that participants generally may make voluntary salary deferral
contributions, on a pre-tax basis, from 1% to 15% of their compensation in the
form of voluntary payroll deductions. The Company may make discretionary
contributions from its annual profits. During fiscal years 1994 and 1995, the
Company's contributions totaled $46,005 and $45,775, respectively. The
contribution is at the sole discretion of the Company and may be changed. No
contribution was made during fiscal 1996.
F-14
<PAGE> 52
SOLO SERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 11 - ASSOCIATE STOCK PURCHASE PLAN:
The Company adopted the Solo Serve Associate Stock Purchase Plan
effective January 1, 1993. The Plan was terminated in December, 1996.
Participation in the Plan was offered to eligible employees of the Company.
Generally, all employees of the Company, excluding members of the Board of
Directors and Officers of the Company, were eligible for participation in the
Plan.
The Associate Stock Purchase Plan enabled eligible associates through
voluntary payroll deductions to purchase in the open market shares of common
stock of the Company at market prices current at the time of purchase through
individual accounts opened by such associates with the transfer agent.
NOTE 12 - POSTRETIREMENT BENEFITS:
In fiscal 1996, the Company terminated its postretirement benefits
plan. Those participants currently receiving benefits under the Plan at the
time of the Plan's termination will continue to receive benefits. The Plan's
termination is not expected to have a material impact on the results of the
Company's operations or financial position.
Prior to the Plan's termination, postretirement life and medical
benefits were provided to former employees who had met the requirements for
postretirement benefits. Generally, all employees of the Company who had
completed ten years of service, had attained age 55 and were enrolled in the
medical plan at least one year prior to retirement were eligible for
postretirement benefits.
Life insurance and medical benefits were offered to retirees on a
combined basis, which meant that a retiree participated in both plans or
neither. The life insurance plan was provided to retirees on a contributory
basis. The medical plan, which was self-insured, covered dependents of
retirees in addition to former employees. Contributions were also required in
the case of medical benefits. The Company's policy was to fund the cost of the
postretirement health care and life insurance benefits in the period in which
the costs are incurred. The following table summarizes the plans' combined
status at February 3, 1996 and February 1, 1997.
<TABLE>
<CAPTION>
FEBRUARY 3, 1996 FEBRUARY 1, 1997
--------------------------------------
<S> <C> <C>
ACCUMULATED POSTRETIREMENT BENEFIT OBLIGATION
Retirees and dependents $ 19,200 -
Fully eligible active plan participants 42,800 -
Other active plan participants 503,200 -
--------------------------------------
Postretirement benefit obligation $ 565,200 -
======================================
</TABLE>
The weighted average discount rates used in determining the APBO at
February 3, 1996 was 7.25%.
Net periodic postretirement benefit expense for 1995 and 1996:
<TABLE>
<CAPTION>
HEALTH CARE LIFE INSURANCE TOTAL
---------------------------------------------------------------------------
1995 1996 1995 1996 1995 1996
<S> <C> <C> <C> <C> <C> <C>
Service Cost $ 12,400 -- $ 2,600 -- $ 15,000 --
Interest Cost 8,900 -- 2,300 -- 11,200 --
Amortization of (gains)/losses (35,500) (434,400) (9,800) (121,800) (45,300) (565,200)
---------------------------------------------------------------------------
Net periodic postretirement benefit
expense ($14,200) ($434,400) ($4,900) ($121,800) ($19,100) ($565,200)
===========================================================================
</TABLE>
The weighted average annual assumed rate of increase in the per capita
cost of covered benefits (i.e. health care cost trend rate) was 8.0% for 1994
and was assumed to decrease gradually to 6.0% by 2020 and remain at that level
thereafter.
F-15
<PAGE> 53
SOLO SERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 13- COMMITMENTS AND CONTINGENCIES:
The Company has operating leases for most of its retail store facilities.
Rental expense for the years ended January 28, 1995, February 3, 1996, and
February 1, 1997 amounted to $5,205,241, $4,169,183, and $4,080,767
respectively. The Company has granted a license to an independent vendor to
occupy 200 square feet of selling space and operate a fine jewelry department
in each of the Company's twelve San Antonio stores. The following table
summarizes payment under these leases:
<TABLE>
<CAPTION>
NET FUTURE
FUTURE MINIMUM SUBLEASE MINIMUM
FISCAL LEASE PAYMENTS INCOME LEASE PAYMENT
---------------------------------------------------------------
<S> <C> <C> <C>
1997 $ 4,463,983 $ 252,000 $ 4,211,983
1998 4,226,832 288,000 3,938,832
1999 3,660,251 168,000 3,492,251
2000 3,148,354 - 3,148,354
2001 2,354,011 - 2,354,011
AFTER 7,120,276 - 7,120,276
---------------------------------------------------------------
$ 24,973,707 $ 708,000 $ 24,265,707
===============================================================
</TABLE>
Some of the Company's operating leases have additional rentals
contingent on individual store sales. The Company may be required to pay
additional rentals if certain sales levels are achieved. For the years ended
January 28, 1995, February 3, 1996, and February 1, 1997 the Company paid
$11,578, none, and none, respectively, under additional rental agreements.
The Company has an employment contract with its chief executive
officer and president that provides for compensation arrangements. The Company
also has a consulting agreement with the Chairman of the Board of Directors
that expires in July 1998.
The Company is involved in litigation arising in the normal course of
business. In the opinion of management, the outcome of this litigation will
not have a material effect on the consolidated financial statements of the
Company.
F-16
<PAGE> 54
REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULE
To the Board of Directors of Solo Serve Corporation
Our audits of the consolidated financial statements referred to in our report
dated May 14, 1997 appearing on page F-2 of this Annual Report on Form 10-K
also included an audit of the Financial Statement Schedule listed in Item
14(a)(2) of the Form 10-K (and appearing on the following page S-2). In our
opinion, this Financial Statement Schedule presents fairly, in all material
respects, the information set forth therein when read in conjunction with the
related consolidated financial statements.
PRICE WATERHOUSE LLP
San Antonio, Texas
May 14, 1997
F-17
<PAGE> 55
SCHEDULE X
SOLO SERVE CORPORATION
SUPPLEMENTARY CONSOLIDATED STATEMENTS OF OPERATIONS INFORMATION
<TABLE>
<CAPTION>
FISCAL 1994 FISCAL 1995 FISCAL 1996
<S> <C> <C> <C>
Maintenance and repairs $ 1,212,377 $ 1,184,744 $ 1,155,092
==========================================================
Depreciation of owned assets 2,971,380 2,141,933 1,841,329
Amortization of leasehold improvements 650,243 552,559 459,539
Amortization of intangibles 126,383 120,532 120,000
==========================================================
Total $ 3,748,006 $ 2,815,024 $ 2,420,868
==========================================================
Advertising Costs $ 4,774,355 $ 3,742,498 $ 2,978,114
==========================================================
</TABLE>
F-18
<PAGE> 56
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit
- ------ ----------------------
<S> <C>
2.1 First Amended Plan of Reorganization of Solo Serve Corporation dated
May 17, 1995
2.2 Non-material Modifications to First Amended Plan of Reorganization
of Solo Serve Corporation, entered July 6, 1995
3.1 Restated Certificate of Incorporation of the Company
3.2 Certificate of Designation of Rights and Preferences of Preferred
Stock
3.3 Bylaws of the Company, as amended and restated
4.1 Specimen Certificate for Common Stock of the Registrant
(representing shares of common stock of the Company after giving
effect to the previously reported 1-for-2 reverse split effected
July 18, 1995)
10.1 Registration Rights Agreement among General Atlantic Corporation,
Robert J. Grimm and the Company
10.2 Agreement Regarding Tax Consequences of Deconsolidation between the
Company and General Atlantic Corporation
10.3 Tax Allocation Agreement between the Company and General Atlantic
Corporation
10.4 Form of Indemnity Agreement between Directors, Executive Officers
and the Company
10.5 Associate Stock Purchase Plan of the Company
10.6 Retirement Savings Plan and Trust of the Company
10.7 Mortgage Note A, dated November 20, 1992, in principal amount of
$4,940,000, with the Company as Maker and Nationwide Life
Insurance Company as Holder
10.8 Mortgage Note B, dated November 20, 1992, in principal amount of
$1,000,000, with the Company as Maker and Employers Life Insurance
Company of Wausau as Holder
10.9 Asset Purchase Agreement between the Company and Ross Stores, Inc.
10.10 Employment Agreement between the Company and David P. Dash
10.11 Employment Agreement between the Company and Robert J. Grimm, as
amended
10.12 Subscription Agreement between the Company and General Atlantic
Corporation
10.13 Solo Serve Corporation 1995 Stock Incentive Plan
10.14 Solo Serve Corporation Director Stock Option Plan
10.15 Escrow Agreement, dated July 18, 1995, by and between Texas Commerce
Bank, National Association, Borrower, General Atlantic Corporation
and the Official Committee of Unsecured Creditors of Solo Serve
Corporation
10.16 Loan and Security Agreement, dated as of June 20, 1995, by and
between Solo Serve Corporation and Congress Financial Corporation
(Southwest)
10.17 Amended Loan and Security Agreement, dated July 18, 1995, by and
between Solo Serve Corporation and MetLife Capital Corporation
10.18 Loan Modification Agreement, dated July 18, 1995, by and among Solo
Serve Corporation, Nationwide Life Insurance Company, and
Employers Life Insurance Company
10.19 Promissory Note, dated July 31, 1995, in principal amount of
$5,565,000, with the Company as Maker, and Texas Commerce Bank
National Association as Holder
10.20 Loan Modification Agreement, dated October 27, 1995, by and between
Solo Serve Corporation and Congress Financial Corporation
(Southwest)
10.21 Employment Agreement between the Company and Timothy L. Grady
10.22 Employment Agreement between the Company and Janet Pollock
10.23 Consulting Services Agreement between the Company and Robert J.
Grimm
10.24 Second Amendment to Loan and Security Agreement, dated January 31,
1996, by and between Solo Serve Corporation and Congress Financial
Corporation (Southwest)
</TABLE>
<PAGE> 57
<TABLE>
<S> <C>
10.25 Letter Agreement dated January 23, 1996 by and between the Company
and MetLife Capital Corporation modifying the Loan and Security
Agreement between the Company and MetLife Capital Corporation, as
amended on July 18, 1995
10.26 Amendment No. 3 to Loan and Security Agreement by and between Solo
Serve Corporation and Congress Financial Corporation (Southwest)
dated June 26, 1996
10.27 Letter of Credit and Security Agreement between Solo Serve
Corporation and General Atlantic Corporation dated as of June 26,
1996
10.28 Intercreditor and Subordination Agreement between Congress Financial
Corporation (Southwest) and General Atlantic Corporation dated as of
June 26, 1996, as acknowledged and agreed to by Solo Serve
Corporation
10.29 Consulting Agreement between the Company and Charles Siegel
10.30 Employment Agreement between the Company and Charles Siegel
10.31 Amendment No. 4 to Loan and Security Agreement by and between Solo
Serve Corporation and Congress Financial Corporation (Southwest)
dated as of September 1, 1996
10.32 Amendment No. 5 to Loan and Security Agreement by and between Solo
Serve Corporation and Congress Financial Corporation (Southwest)
dated as of March 31, 1997
10.33 Letter Agreement dated March 28, 1997 by and between the Company
and MetLife Capital Corporation modifying the Loan and Security
Agreement between the Company and MetLife Capital Corporation, as
amended on July 18, 1995
10.34 Letter Agreement dated July 8, 1996 by and between the Company and
Ross E. Bacon.
10.35 Amendment No. 6 to Loan and Security Agreement by and between Solo
Serve Corporation and Congress Financial Corporation (Southwest)
dated as of May 19, 1997.
21.1 Subsidiaries of the Registrant
23.1 Consent of Independent Accountants
27 Financial Data Schedule
</TABLE>
- ------------
*INCORPORATED BY REFERENCE. SEE PAGE 35 FOR REFERENCES.
<PAGE> 1
EXHIBIT 3.3
AMENDED AND
RESTATED BY-LAWS
OF
SOLO SERVE CORPORATION
ARTICLE I
OFFICES
Section 1. Registered Office. The registered office of the Corporation
shall be in the City of Wilmington, County of New Castle, State of Delaware.
Section 2. Other Offices. The Corporation may also have offices at
such other places both within and without the State of Delaware as the Board of
Directors may from time to time determine or the business of the Corporation
may require.
ARTICLE II
MEETINGS OF STOCKHOLDERS
Section l. Time and Place of Meeting. All meetings of the stockholders
shall be held at such time and at such place within or without the State of
Delaware as shall be designated by the Board of Directors and stated in the
notice of the meeting or in a duly executed waiver of notice thereof.
Section 2. Annual Meetings. An annual meeting of the stockholders
shall be held each year on such date and at such time as shall be designated
from time to time by the Board of Directors, and stated in the notice of the
meeting, at which meeting the stockholders shall elect, in accordance with the
Certificate of Incorporation, a board of directors and transact such other
business as may properly be brought before the meeting.
Section 3. Special Meetings. Special meetings of the stockholders, for
any proper purpose or purposes, unless otherwise prescribed by statute or by
the Certificate of Incorporation of the Corporation, may be called at any time
by the Board of Directors or the President pursuant to a resolution adopted by
a majority of the entire Board of Directors. Such request shall state the
purpose or purposes of the proposed
<PAGE> 2
meeting. Business transacted at special meetings shall be confined to the
purpose or purposes stated in the notice of the meeting.
Section 4. Notice. Written or printed notice stating the place, date
and hour of any meeting of stockholders, and in the case of a special meeting,
the purpose or purposes for which the meeting is called, shall be delivered not
less than ten (10) nor more than sixty (6O) days before the date of the
meeting, either personally or by mail, by or at the direction of the President,
a Vice President, the Secretary, an Assistant Secretary or the person calling
the meeting, to each stockholder of record entitled to vote at such meeting. If
mailed, such notice shall be deemed to be delivered when deposited in the
United States mail, postage prepaid, addressed to the stockholder at his
address as it appears on the stock ledger of the Corporation.
Section 5. List of Stockholders. The officer or agent of the
Corporation having charge of the stock ledger of the Corporation shall prepare
and make, at least ten (10) days before each meeting of the stockholders, a
complete list of the stockholders entitled to vote at such meeting or any
adjournment thereof, arranged in alphabetical order, and showing the address of
each stockholder and the number of shares registered in the name of each
stockholder. Such list, for a period of ten (10) days prior to such meeting,
shall be open to the examination of any stockholder, for any purpose germane to
the meeting, during ordinary business hours, either at a place within the city
where the meeting is to be held, which place shall be specified in the notice
of the meeting or, if not so specified, at the place where the meeting is to be
held. Such list shall also be produced and kept open at the time and place of
the meeting and shall be subject to the inspection of any stockholder during
the whole time of the meeting. The stock ledger shall be the only evidence as
to who are the stockholders entitled to examine such list or stock ledger, or
to vote at any meetings of stockholders.
Section 6. Quorum. The holders of a majority of the capital stock
issued and outstanding and entitled to be cast thereat, present in person or
represented by proxy, shall constitute a quorum at all meetings of the
stockholders for the transaction of business except as otherwise provided by
statute or by the Certificate of Incorporation. If, however, such quorum shall
not be present or represented at any meeting of the stockholders, the
stockholders entitled to vote thereat, present in person or represented by
proxy, shall have power to adjourn the meeting from time to time until a quorum
shall be present or represented without notice of the adjourned meeting other
than announcement of the time and place thereof at the meeting at which the
adjournment is taken. When any adjourned meeting is reconvened and a quorum
shall be present or represented, any business may be transacted which might
have been transacted at the original meeting. If the adjournment is for more
than thirty (3O) days, or if after the adjournment a new record date is fixed
for the adjourned meeting, a notice of the adjourned meeting shall be given to
each stockholder of record entitled to vote at the meeting.
<PAGE> 3
Section 7. Voting. When a quorum is present at any meeting, the vote
of the holders of the shares present or represented by proxy at such meeting
and representing a majority of the votes entitled to be cast by each class of
stock shall decide any question brought before such meeting, unless the vote of
a different number is expressly required by statute, the Certificate of
Incorporation or these By-Laws. The Board of Directors, in its discretion, or
the officer of the Corporation presiding at a meeting of stockholders in his
discretion, may require that any votes cast at such meeting shall be cast by
written ballot.
Section 8. Proxy. Unless otherwise provided in the Certificate of
Incorporation, each stockholder shall at every meeting of the stockholders be
entitled to one vote in person or by proxy for each share having voting power
held by such stockholder. Every proxy must be executed in writing (which shall
include telegraphing, facsimile transmission or cabling) by the stockholder or
by his duly authorized attorney-in-fact, but no proxy shall be voted on after
three years from its date, unless the proxy provides for a longer period.
Section 9. Action Without a Meeting. Unless otherwise provided in the
Certificate of Incorporation, any action required to be taken at any annual or
special meeting of stockholders of the Corporation, or any action which may be
taken at any annual or special meeting of such stockholders, may be taken
without a meeting, without prior notice and without a vote, if a consent in
writing (which shall include telegraphing, facsimile transmission or cabling),
setting forth the action so taken, shall be signed by the holders of
outstanding shares of the Corporation having not less than the minimum number
of votes that would be necessary to authorize or take such action at a meeting
at which all shares entitled to vote thereon were present and voted. Prompt
notice of the taking of the corporate action without a meeting by less than
unanimous written consent shall be given to those stockholders who have not
consented in writing.
Section 10. Notice of Business. At any meeting of stockholders, only
such business shall be conducted as shall have been brought before the meeting
(a) by or at the direction of the Board of Directors or (b) by any stockholder
of the Corporation who is a stockholder of record at the time of giving of the
notice provided for in this Section 10 of this Article II, who shall be
entitled to vote at such meeting and who complies with the notice procedures
set forth in this Section 10 of this Article II. For business to be properly
brought before a meeting of stockholders by a stockholder, the stockholder
shall have given timely notice thereof in writing to the Secretary of the
Corporation. To be timely, a stockholder's notice shall be delivered to or
mailed and received at the principal executive offices of the Corporation not
less than ninety (90) days nor more than 120 days prior to the meeting;
provided, however, that in the event that less than 100 days' notice or prior
public disclosure of the date of the meeting is given or made to stockholders,
notice by the stockholder to be timely must be so received not later than the
close of business on the tenth day following the day on which such notice of
the date of the meeting was mailed or such public disclosure was made,
whichever first
<PAGE> 4
occurs. Such stockholder's notice to the Secretary shall set forth as to each
matter the stockholder proposes to bring before the meeting (a) a brief
description of the business desired to be brought before the meeting, the
reasons for conducting such business at the meeting and, in the event that such
business includes a proposal to amend either the Certificate of Incorporation
or By-Laws of the Corporation, the language of the proposed amendment, (b) the
name and address, as they appear on the Corporation's books, of the stockholder
proposing such business, (c) the class and number of shares of capital stock of
the Corporation which are beneficially owned by such stockholder and (d) any
material interest of such stockholder in such business. Notwithstanding
anything in the By-Laws to the contrary, no business shall be conducted at a
stockholder meeting except in accordance with the procedures set forth in this
Section 10 of this Article II. The Chairman of the meeting shall, if the facts
warrant, determine and declare to the meeting that business was not properly
brought before the meeting and in accordance with the provisions of the
By-Laws, and if he should so determine, he shall so declare to the meeting and
any such business not properly brought before the meeting shall not be
transacted. Notwithstanding the foregoing provisions of this Section 10 of this
Article II, a stockholder shall also comply with all applicable requirements of
the Securities Exchange Act of 1934, as amended, and the rules and regulations
thereunder with respect to the matters set forth in this Section 10 of this
Article II.
ARTICLE III
DIRECTORS
Section 1. Number and Election of Directors. The business and affairs
of the Corporation shall be managed by or under the direction of a Board of
Directors consisting of not less than three (3) nor more than eleven (11)
persons, who need not be residents of the State of Delaware or stockholders of
the Corporation. The exact number of directors within the minimum and maximum
limitations specified in the preceding sentence shall be fixed from time to
time by resolution adopted by the affirmative vote of a majority of the
directors then in office. The directors shall be divided into three classes,
designated Class I, Class II and Class III, with the term of office of Class I
to expire at the 1993 Annual Meeting of Stockholders, of Class II to expire at
the 1994 Annual Meeting of Stockholders and of Class III to expire at the 1995
Annual Meeting of Stockholders. Each class shall consist, as nearly as may be
possible, of an equal total number of directors. At each annual meeting of
stockholders beginning in 1993, successors to the class of directors whose term
expires at that annual meeting shall be elected for a three-year term. If the
number of directors is changed, any increase or decrease shall be apportioned
among the classes so as to maintain the number of directors in each class as
nearly equal as possible, but in no case shall a decrease in the number of
directors shorten the term of any incumbent director. A director shall hold
office until the annual meeting for the year in which his
<PAGE> 5
term expires and until his successor shall be elected and shall qualify,
subject, however, to prior death, resignation, retirement, disqualification or
removal from office.
Notwithstanding the foregoing, whenever the holders of any one or more
classes or series of preferred stock issued by the Corporation, if any, shall
have the right, voting separately by class or series, to elect directors at an
annual or special meeting of stockholders, the election, term of office,
filling of vacancies and other features of such directorships shall be governed
by the terms of the Certificate of Incorporation applicable thereto, and such
directors so elected shall not be divided into classes pursuant to this Section
1 of this Article III unless expressly provided by such terms.
Section 2. Vacancies and Additional Directorships. Unless otherwise
provided in the Certificate of Incorporation, vacancies and newly created
directorships resulting from any increase in the authorized number of directors
may be filled by a majority of the directors then in office, though less than a
quorum, or by a sole remaining director, and the directors so chosen shall hold
office until the next annual election and until their successors are duly
elected and shall qualify. In the event a person serving on the Board of
Directors is removed (either for cause or without cause), resigns or fails or
refuses to act for any reason, then a majority of the remaining members of the
Board of Directors shall elect such person's successor to serve on the Board of
Directors.
Section 3. General Powers. The business and affairs of the Corporation
shall be managed by its Board of Directors, which may exercise all powers of
the Corporation and do all such lawful acts and things as are not by statute,
or by the Certificate of Incorporation or by these By-Laws directed or required
to be exercised or done by the stockholders.
Section 4. Place of Meetings. The Directors of the Corporation may
hold their meetings, both regular and special, either within or without the
State of Delaware.
Section 5. Meetings. The Board of Directors of the Corporation may
hold meetings, both regular and special, either within or without the State of
Delaware. Regular meetings of the Board of Directors may be held without notice
at such time and at such place as may from time to time be determined by the
Board of Directors. Special meetings of the Board of Directors may be called by
the Chairman, if there be one, the President or any two directors. Notice
thereof stating the place, date and hour of the meeting shall be given to each
director either by mail not less than forty-eight (48) hours before the date of
the meeting, by telephone, electronic facsimile or telegram on twenty-four (24)
hours notice, or on such shorter notice as the person or persons calling such
meeting may deem necessary or appropriate in the circumstances.
Section 6. Quorum; Voting. Unless otherwise provided by statute, the
Certificate of Incorporation or these By-Laws, at all meetings of the Board of
Directors, the presence of a majority of the number of directors constituting
the whole Board shall be
<PAGE> 6
necessary and sufficient to constitute a quorum for the transaction of
business, and the affirmative vote of a majority of the number of Directors
present at any meeting at which there is a quorum shall be the act of the Board
of Directors.
If a quorum is not present at any meeting of the Directors, the
Directors present thereat may adjourn the meeting from time to time, without
notice other than announcement at the meeting, until a quorum is present. Upon
attainment of representation by a quorum, subsequent to an adjournment of the
meeting, any business may be transacted which might have been transacted at the
meeting as originally notified.
Section 7. Committees. The Board of Directors may, by resolution
passed by a majority of the entire Board of Directors, designate one or more
committees, each committee to consist of one or more of the directors of the
Corporation. The Board of Directors may designate one or more directors as
alternate members of any committee, who may replace any absent or disqualified
member at any meeting of any such committee. In the absence or disqualification
of a member of a committee, and in the absence of a designation by the Board of
Directors of an alternate member to replace the absent or disqualified member,
the member or members thereof present at any meeting and not disqualified from
voting, whether or not he or they constitute a quorum, may unanimously appoint
another member of the Board of Directors to act at the meeting in the place of
any absent or disqualified member. Any committee, to the extent allowed by law
and provided in the resolution establishing such committee, shall have and may
exercise all the powers and authority of the Board of Directors in the
management of the business and affairs of the Corporation. Each committee shall
keep regular minutes and report to the Board of Directors when required.
Section 8. Compensation of Directors. Directors who are not also
officers of the Corporation shall be compensated at the rate of $6,000 per
annum, payable in quarterly amounts of $1,500.00. Such directors shall also be
paid $1,000.00 for each duly called meeting of the Board of Directors and shall
be reimbursed for reasonable expenses of travel, meals and accommodations in
connection with such meeting. Nothing herein contained shall be construed to
preclude any director from serving the Corporation in any other capacity and
receiving compensation therefor."
Section 9. Action Without a Meeting. Unless otherwise restricted by
the Certificate of Incorporation or these By-Laws, any action required or
permitted to be taken at any meeting of the Board of Directors or of any
committee designated by the Board of Directors may be taken without a meeting
if all members of the Board or committee, as the case may be, consent thereto
in writing, and the writing or writings are filed with the minutes of
proceedings of the Board or Committee.
Section 10. Meetings by Conference Call, Etc. Unless otherwise
restricted by the Certificate of Incorporation or these By-Laws, members of the
Board of Directors, or any committee designated by the Board of Directors, may
participate in a meeting of
<PAGE> 7
the Board of Directors, or any committee, by means of conference telephone or
similar communications equipment by means of which all persons participating in
the meeting can hear each other, and such participation in a meeting shall
constitute presence in person at the meeting.
Section 11. Reliance Upon Books. Directors and members of any
committee designated by the Board of Directors shall, in the performance of
their duties, be fully protected in relying in good faith upon the books of
accounts or reports made to the Corporation by any of its officers, or by an
independent certified public accountant, or by an appraiser selected with
reasonable care by the Board of Directors or by any such committee, or in
relying in good faith upon other records of the Corporation.
ARTICLE IV
NOTICES
Section 1. Form of Notice. Whenever under the provisions of the
Certificate of Incorporation, these By-Laws or by statute, notice is required
to be given to any director or stockholder, and no provision is made as to how
such notice shall be given, it shall not be construed to mean personal notice,
but any such notice may be given in writing and personally delivered or sent by
mail, postage prepaid, addressed to such director or stockholder at such
address as appears on the books of the Corporation, and any such notice
required or permitted to be given by mail shall be deemed to be given at the
time when the same be thus deposited in the United States mail as aforesaid;
such notice may also be given by some form of electronic transmission, in which
case it shall be so addressed as to be received by such director or stockholder
at the address of such director or stockholder as it appears on the books of
the Corporation or at a regular place of such director's or stockholder's
business, in which case such notice shall be deemed to be given at the time
when the recipient of such transmission acknowledges its receipt.
Section 2. Waiver. Whenever any notice is required to be given to any
director or stockholder of the Corporation under the provisions of the
statutes, the Certificate of Incorporation or these By-Laws, a waiver thereof
in writing signed by the person or persons entitled to such notice, whether
before or after the time stated in such notice, shall be deemed equivalent to
the giving of such notice. Neither the business to be transacted at, nor the
purpose of, any regular or special meeting of the stockholders, directors, or
members of a committee of directors need be specified in any written waiver of
notice. Attendance of a person at a meeting shall constitute a waiver of notice
of such meeting, except when the attendance is for the express purpose of
objecting, at the beginning of the meeting, to the transaction of any business
because the meeting is not lawfully called or convened.
<PAGE> 8
ARTICLE V
OFFICERS
Section 1. General. The officers of the Company shall be elected by
the Board of Directors and shall be a President, a Vice President, a Secretary
and a Treasurer. The Board of Directors may, in its discretion, elect one or
more Vice Presidents, one or more Assistant Secretaries and one or more
Assistant Treasurers, all of whom shall also be officers. The Board of
Directors may also, in its discretion, elect a Chairman of the Board of
Directors (who must also be a director) who shall not be an officer. Two or
more offices may be held by the same person, unless the Certificate of
Incorporation or these By-laws otherwise provide. The officers of the Company
need not be stockholders of the Company nor need such officers be directors of
the Company.
Section 2. Election. The Board of Directors at its first meeting held
after each Annual Meeting of Stockholders shall elect the officers of the
Corporation, who shall hold their offices for such terms and shall exercise
such powers and perform such duties as shall be determined from time to time by
the Board of Directors; and all officers of the Corporation shall hold office
until their successors are chosen and qualified, or until their earlier
resignation or removal. Any officer elected by the Board of Directors may be
removed at any time by the affirmative vote of a majority of the Board of
Directors. Any vacancy occurring in any office of the Corporation shall be
filled by the Board of Directors. The salaries of all officers of the
Corporation shall be fixed by the Board of Directors.
Section 3. Voting Securities Owned by the Corporation. Powers of
attorney, proxies, waivers of notice of meeting, consents and other instruments
relating to securities owned by the Corporation may be executed in the name of
and on behalf of the Corporation by the President or any Vice President and any
such officer may, in the name of and on behalf of the Corporation, take all
such action as any such officer may deem advisable to vote in person or by
proxy at any meeting of security holders of any corporation in which the
Corporation may own securities and at any such meeting shall possess and may
exercise any and all rights and powers incident to the ownership of such
securities and which, as the owner thereof, the Corporation might have
exercised and possessed if present. The Board of Directors may, by resolution,
from time to time confer like powers upon any other person or persons.
Section 4. Chairman of the Board of Directors. The Chairman of the
Board of Directors, if there be one, shall preside at all meetings of the
stockholders and of the Board of Directors. Except where by law the signature
of the President is required, the Chairman of the Board of Directors shall
possess the same power as the President to sign all contracts, certificates and
other instruments of the Corporation which may be authorized by the Board of
Directors. During the absence or disability of the President, the Chairman of
the Board of Directors shall exercise all the powers and discharge all the
duties of the President. The Chairman of the Board of Directors shall also
perform
<PAGE> 9
such other duties and may exercise such other powers as from time to time may
be assigned to him by these By-Laws or by the Board of Directors.
Section 5. President. The President shall, subject to the control of
the Board of Directors and, if there be one, the Chairman of the Board of
Directors, have general supervision of the business of the Corporation and
shall see that all orders and resolutions of the Board of Directors are carried
into effect. He shall execute all bonds, mortgages, contracts and other
instruments of the Corporation requiring a seal, under the seal of the
Corporation, except where required or permitted by law to be otherwise signed
and executed and except that the other officers of the Corporation may sign and
execute documents when so authorized by these By-Laws, the Board of Directors
or the President. In the absence or disability of the Chairman of the Board of
Directors, or if there be none, the President shall preside at all meetings of
the stockholders and the Board of Directors. The President shall also perform
such other duties and may exercise such other powers as from time to time may
be assigned to him by these By-Laws or by the Board of Directors.
Section 6. Vice Presidents. At the request of the President or in his
absence or in the event of his inability or refusal to act (and if there be no
Chairman of the Board of Directors), the Vice President or the Vice Presidents
if there is more than one (in the order designated by the Board of Directors)
shall perform the duties of the President, and when so acting, shall have all
the powers of and be subject to all the restrictions upon the President. Each
Vice President shall perform such other duties and have such other powers as
the Board of Directors from time to time may prescribe. If there be no Chairman
of the Board of Directors and no Vice President, the Board of Directors shall
designate the officer of the Corporation who, in the absence of the President
or in the event of the inability or refusal of the President to act, shall
perform the duties of the President, and when so acting, shall have all the
powers of and be subject to all the restrictions upon the President.
Section 7. Secretary. The Secretary shall attend all meetings of the
Board of Directors and all meetings of stockholders and record all the
proceedings thereat in a book or books to be kept for that purpose; the
Secretary shall also perform like duties for the standing committees when
required. The Secretary shall give, or cause to be given, notice of all
meetings of the stockholders and special meetings of the Board of Directors,
and shall perform such other duties as may be prescribed by the Board of
Directors or President, under whose supervision he shall be. If the Secretary
shall be unable or shall refuse to cause to be given notice of all meetings of
the stockholders and special meetings of the Board of Directors, and if there
be no Assistant Secretary, then either the Board of Directors or the President
may choose another officer to cause such notice to be given. The Secretary
shall have custody of the seal of the Corporation and the Secretary or any
Assistant Secretary, if there be one, shall have authority to affix the same to
any instrument requiring it and when so affixed, it may be attested by the
signature of the Secretary or by the signature of any such Assistant Secretary.
The Board of Directors may give general authority to any other officer to
<PAGE> 10
affix the seal of the Corporation and to attest the affixing by his signature.
The Secretary shall see that all books, reports, statements, certificates and
other documents and records required by law to be kept or filed are properly
kept or filed, as the case may be.
Section 8. Treasurer. The Treasurer shall have the custody of the
corporate funds and securities and shall keep full and accurate accounts of
receipts and disbursements in books belonging to the Corporation and shall
deposit all moneys and other valuable effects in the name and to the credit of
the Corporation in such depositories as may be designated by the Board of
Directors. The Treasurer shall disburse the funds of the Corporation as may be
ordered by the Board of Directors, taking proper vouchers for such
disbursements, and shall render to the President and the Board of Directors, at
its regular meetings, or when the Board of Directors so requires, an account of
all his transactions as Treasurer and of the financial condition of the
Corporation. If required by the Board of Directors, the Treasurer shall give
the Corporation a bond in such sum and with such surety or sureties as shall be
satisfactory to the Board of Directors for the faithful performance of the
duties of his office and for the restoration to the Corporation, in case of his
death, resignation, retirement or removal from office, of all books, papers,
vouchers, money and other property of whatever kind in his possession or under
his control belonging to the Corporation.
Section 9. Assistant Secretaries. Except as may be otherwise provided
in these By-Laws, Assistant Secretaries, if there be any, shall perform such
duties and have such powers as from time to time may be assigned to them by the
Board of Directors, the President, any Vice President, if there be one, or the
Secretary, and in the absence of the Secretary or in the event of his
disability or refusal to act, shall perform the duties of the Secretary, and
when so acting, shall have all the powers of and be subject to all the
restrictions upon the Secretary.
Section 10. Assistant Treasurers. Assistant Treasurers, if there be
any, shall perform such duties and have such powers as from time to time may be
assigned to them by the Board of Directors, the President, any Vice President,
if there be one, or the Treasurer, and in the absence of the Treasurer or in
the event of his disability or refusal to act, shall perform the duties of the
Treasurer, and when so acting, shall have all the powers of and be subject to
all the restrictions upon the Treasurer. If required by the Board of Directors,
an Assistant Treasurer shall give the Corporation a bond in such sum and with
such surety or sureties as shall be satisfactory to the Board of Directors for
the faithful performance of the duties of his office and for the restoration to
the Corporation, in case of his death, resignation, retirement or removal from
office, of all books, papers, vouchers, money and other property of whatever
kind in his possession or under his control belonging to the Corporation.
Section 11. Other Officers. Such other officers as the Board of
Directors may choose shall perform such duties and have such powers as from
time to time may be
<PAGE> 11
assigned to them by the Board of Directors. The Board of Directors may delegate
to any other officer of the Corporation the power to choose such other officers
and to prescribe their respective duties and powers.
ARTICLE VI
CERTIFICATES REPRESENTING SHARES
Section 1. Form of Certificates. The Corporation shall deliver
certificates representing all shares to which stockholders are entitled.
Certificates representing shares of the Corporation shall be in such form as
shall be determined by the Board of Directors and shall be numbered
consecutively and entered in the books of the Corporation as they are issued.
Each certificate shall state on the face thereof the holder's name, the number,
class of shares, and the par value of the shares or a statement that the shares
are without par value. They shall be signed by the President or a Vice
President, and by the Secretary or an Assistant Secretary, or the Treasurer or
an Assistant Treasurer, and may be sealed with the seal of the Corporation or a
facsimile thereof if the Corporation shall then have a seal. If any certificate
is countersigned by a transfer agent or registered by a registrar, either of
which is other than the Corporation or an employee of the Corporation, the
signatures of the Corporation's officers may be facsimiles. In case any
officer, transfer agent or registrar who has signed, or whose facsimile
signature has been placed on such certificate, shall cease to be such officer,
transfer agent or registrar, whether because of death, resignation or
otherwise, before such certificate has been delivered by the Corporation or its
agents, such certificate may nevertheless be issued and delivered with the same
effect as if he were such officer, transfer agent or registrar at the date of
issue.
If the Corporation shall be authorized to issue more than one class of
stock or more than one series of any class, the powers, designations,
preferences and relative, participating, optional or other special rights of
each class of stock or series thereof and the qualification, limitations or
restrictions or such preferences and/or rights shall be set forth in full or
summarized on the face or back of the certificate which the Corporation shall
issue to represent such class or series of stock, provided that, except as
otherwise provided in section 202 of the General Corporation Law of Delaware,
in lieu of the foregoing requirements, there may be set forth on the face or
back of the certificate which the Corporation shall issue to represent such
class or series of stock, a statement that the Corporation will furnish without
charge to each stockholder who so requests the powers, designations,
preferences and relative, participating, optional or other special rights of
each class of stock or series thereof and the qualifications, limitations or
restrictions of such preferences and/or rights.
Section 2. Lost Certificates. The Board of Directors may direct that a
new certificate be issued in place of any certificate theretofore issued by the
Corporation alleged to have been lost, stolen or destroyed, upon the making of
an affidavit of that
<PAGE> 12
fact by the person claiming the certificate to be lost, stolen or destroyed.
When authorizing the issue of a new certificate, the Board of Directors, in its
discretion and as a condition precedent to the issuance thereof, may require
the owner of the lost, stolen or destroyed certificate, or his legal
representative, to advertise the same in such manner as it shall require and/or
give the Corporation a bond in such form, in such sum, and with such surety or
sureties as it may direct as indemnity against any claim that may be made
against the Corporation with respect to the certificate alleged to have been
lost, stolen or destroyed.
Section 3. Transfer of Shares. Shares of stock of the Corporation
shall be transferrable in the manner prescribed by law and in these By-Laws.
Shares of stock shall be transferable only on the books of the Corporation by
the holder thereof in person or by his duly authorized attorney and, upon
surrender to the Corporation or to the transfer agent of the Corporation of a
certificate representing shares duly endorsed or accompanied by proper evidence
of succession, assignment or authority to transfer, it shall be the duty of the
Corporation or the transfer agent of the Corporation to issue a new certificate
to the person entitled thereto, cancel the old certificate and record the
transaction upon its books.
Section 4. Registered Stockholders. The Corporation shall be entitled
to recognize the exclusive right of a person registered on its books as the
owners of shares to receive dividends, and to vote as such owner, and to hold
liable for calls and assessments a person registered on its books as the owner
of shares, and, accordingly, shall not be bound to recognize any equitable or
other claim to or interest in such share or shares on the part of any other
person, whether or not it shall have express or other notice thereof, except as
otherwise provided by law.
Section 5. Record Date. In order that the Corporation may determine
the stockholders entitled to notice of or to vote at any meeting of
stockholders or any adjournment thereof, or to express consent to corporate
action in writing without a meeting, or entitled to receive payment of any
dividend or other distribution or allotment of any rights, or entitled to
exercise any rights in respect of any change, conversion or exchange of stock
or for the purpose of any other lawful action, the Board of Directors may fix,
in advance, a record date, which shall not be more than sixty nor less than ten
days before the date of such meeting, nor more than sixty days prior to any
other action. A determination of stockholders of record entitled to notice of
or to vote at a meeting of stockholders shall apply to any adjournment of the
meeting; provided, however, that the Board of Directors may fix a new record
date for the adjourned meeting.
<PAGE> 13
ARTICLE VII
GENERAL PROVISIONS
Section 1. Dividends. Dividends upon the capital stock of the
Corporation, subject to the provisions of the statutes and of the Certificate
of Incorporation, if any, may be declared by the Board of Directors at any
regular or special meeting. Dividends may be declared and paid in cash, in
property, or in shares of the capital stock of the Corporation, provided that
all such declarations and payments of dividends shall be in strict compliance
with all applicable laws and the Certificate of Incorporation.
Section 2. Fiscal Year. The fiscal year of the Corporation shall be
fixed by resolution of the Board of Directors.
Section 3. Seal. The corporate seal may be used by causing it or a
facsimile thereof to be impressed or affixed or reproduced or otherwise.
Section 4. Annual Statement. The Board of Directors shall present at
each annual meeting and when called for by vote of the stockholders at any
special meeting of the stockholders, a full and clear statement of the business
and condition of the Corporation.
ARTICLE VIII
INDEMNIFICATION
Section 1. Power to Indemnify in Actions, Suits or Proceedings Other
Than Those by or in the Right of the Corporation. Subject to Section 3 of this
Article VIII, the Corporation shall indemnify any person who was or is a party
or is threatened to be made a party to any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the Corporation) by
reason of the fact that he is or was a director or officer of the Corporation,
or is or was serving at the request of the Corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust,
employee benefit plan or other enterprise, against expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by him in connection with such action, suit or proceeding
if he acted in good faith and in a manner he reasonably believed to be in or
not opposed to the best interests of the Corporation, and, with respect to any
criminal action or proceeding, had no reasonable cause to believe his conduct
was unlawful. The termination of any action, suit or proceeding by judgment,
order, settlement, conviction, or upon a plea of nolo contendere or its
equivalent, shall not, of itself, create a presumption that the person did not
act in good faith and in a manner which he reasonably believed to be in or not
opposed to the best interests of the Corporation, and, with respect to any
criminal action or proceeding, had reasonable cause to believe that his conduct
was unlawful.
Section 2. Power to Indemnify in Actions, Suits or Proceedings by or
in the Right of the Corporation. Subject to Section 3 of this Article VIII, the
Corporation shall
<PAGE> 14
indemnify any person who was or is a party or is threatened to be made a party
to any threatened, pending or completed action or suit by or in the right of
the Corporation to procure a judgment in its favor by reason of the fact that
he is or was a director or officer, of the Corporation, or is or was serving at
the request of the Corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust, employee benefit plan
or other enterprise against expenses (including attorneys' fees) actually and
reasonably incurred by him in connection with the defense or settlement of such
action or suit if he acted in good faith and in a manner he reasonably believed
to be in or not opposed to the best interests of the Corporation; except that
no indemnification shall be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable to the Corporation
unless and only to the extent that the Court of Chancery or the court in which
such action or suit was brought shall determine upon application that, despite
the adjudication of liability but in view of all the circumstances of the case,
such person is fairly and reasonably entitled to indemnity for such expenses
which the Court of Chancery or such other court shall deem proper.
Section 3. Authorization of Indemnification. Any indemnification under
this Article VIII (unless ordered by a court) shall be made by the Corporation
only as authorized in the specific case upon a determination that
indemnification of the director or officer is proper in the circumstances
because he has met the applicable standard of conduct set forth in Section 1 or
Section 2 of this Article VIII, as the case may be. Such determination shall be
made (i) by the Board of Directors by a majority vote of a quorum consisting of
directors who were not parties to such action, suit or proceeding, or (ii) if
such a quorum is not obtainable, or, even if obtainable, a quorum of
disinterested directors so directs, by independent legal counsel in a written
opinion, or (iii) by the stockholders. To the extent, however, that a director
or officer of the Corporation has been successful on the merits or otherwise in
defense of any action, suit or proceeding described above, or in defense of any
claim, issue or matter therein, he shall be indemnified against expenses
(including attorneys' fees) actually and reasonably incurred by him in
connection therewith, without the necessity of authorization in the specific
case.
Section 4. Good Faith Defined. For purposes of any determination under
Section 3 of this Article VIII, a person shall be deemed to have acted in good
faith and in a manner he reasonably believed to be in or not opposed to the
best interests of the Corporation, or, with respect to any criminal action or
proceeding, to have had no reasonable cause to believe his conduct was
unlawful, if his action is based on the records or books of account of the
Corporation or another enterprise, or on information supplied to him by the
officers of the Corporation or another enterprise in the course of their
duties, or on the advice of legal counsel for the Corporation or another
enterprise or on information or records given or reports made to the
Corporation or another enterprise by an independent certified public accountant
or by an appraiser or other expert selected with reasonable care by the
Corporation or another enterprise. The term "another enterprise" as used in
this Section 4 of this Article VIII shall mean any
<PAGE> 15
other corporation or any partnership, joint venture, trust, employee benefit
plan or other enterprise of which such person is or was serving at the request
of the Corporation as a director, officer, employee or agent. The provision of
this Section 4 of this Article VIII shall not be deemed to be exclusive or to
limit in any way the circumstances in which a person may be deemed to have met
the applicable standard of conduct set forth in Section 1 or Section 2 of this
Article VIII, as the case may be.
Section 5. Indemnification by a Court. Notwithstanding any contrary
determination in the specific case under Section 3 of this Article VIII, and
notwithstanding the absence of any determination thereunder, any director or
officer may apply to any court of competent jurisdiction in the State of
Delaware for indemnification to the extent otherwise permissible under Sections
1 and 2 of this Article VIII. The basis of such indemnification by a court
shall be a determination by such court that indemnification of the director or
officer is proper in the circumstances because he has met the applicable
standards of conduct set forth in Section 1 or Section 2 of this Article VIII,
as the case may be. Neither a contrary determination in the specific case under
Section 3 of this Article VIII nor the absence of any determination thereunder
shall be a defense to such application or create a presumption that the
director or officer seeking indemnification has not met any applicable standard
of conduct. Notice of any application for indemnification pursuant to this
Section 5 of this Article VIII shall be given to the Corporation promptly upon
the filing of such application. If successful, in whole or in part, the
director or officer seeking indemnification shall also be entitled to be paid
the expense of prosecuting such application.
Section 6. Expenses Payable in Advance. Expenses incurred by a
director or officer in defending or investigating a threatened or pending
action, suit or proceeding may be paid by the Corporation in advance of the
final disposition of such action, suit or proceeding upon receipt of any
undertaking by or on behalf of such director or officer to repay such amount if
it shall ultimately be determined that he is not entitled to be indemnified by
the Corporation as authorized in this Article VIII.
Section 7. Nonexclusivity of Indemnification and Advancement of
Expenses. The indemnification and advancement of expenses provided by or
granted pursuant to his Article VIII shall not be deemed exclusive of any other
rights to which those seeking indemnification or advancement of expenses may be
entitled under any By-Law, agreement, contract, vote of stockholders or
disinterested directors or pursuant to the direction (howsoever embodied) of
any court of competent jurisdiction or otherwise, both as to action in his
official capacity and as to action in another capacity while holding such
office, it being the policy of the Corporation that indemnification of the
persons specified in Sections 1 and 2 of this Article VIII shall be made to the
fullest extent permitted by law. The provisions of this Article VIII shall not
be deemed to preclude the indemnification of any person who is not specified in
Section 1 or Section 2 of this Article VIII but whom the Corporation has the
power or obligation to indemnify
<PAGE> 16
under the provisions of the General Corporation Law of the State of Delaware,
or otherwise.
Section 8. Insurance. The Corporation may purchase and maintain
insurance on behalf of any person who is or was a director or officer of the
Corporation, or is or was serving at the request of the Corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust, employee benefit plan or other enterprise against any liability
asserted against him and incurred by him in any such capacity, or arising out
of his status as such, whether or not the Corporation would have the power or
the obligation to indemnify him against such liability under the provisions of
this Article VIII.
Section 9. Certain Definitions. For purposes of this Article VIII,
references to "the Corporation" shall include, in addition to the resulting
corporation, any constituent corporation (including any constituent of a
constituent) absorbed in a consolidation or merger which, if its separate
existence had continued, would have had power and authority to indemnify its
directors and officers, so that any person who is or was a director or officer
of such constituent corporation, or is or was a director or officer of such
constituent corporation serving at the request of such constituent corporation
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust, employee benefit plan or other enterprise, shall stand in
the same position under the provisions of this Article VIII with respect to the
resulting or surviving corporation as such indemnification relates to his acts
while serving in any of the foregoing capacities, of such constituent
corporation, as he would have with respect to such constituent corporation if
its separate existence had continued. For purposes of this Article VIII,
references to "fines" shall include any excise taxes assessed on a person with
respect to an employee benefit plan; and references to "serving at the request
of the Corporation" shall include any service as a director or officer of the
Corporation which imposes duties on, or involves services by, such director or
officer with respect to an employee benefit plan, its participants or
beneficiaries; and a person who acted in good faith and in a manner he
reasonably believed to be in the interest of the participants and beneficiaries
of an employee benefit plan shall be deemed to have acted in a manner "not
opposed to the best interests of the Corporation" as referred to in this
Article VIII.
Section 10. Survival of Indemnification and Advancement of Expenses.
The indemnification and advancement of expenses provided by, or granted
pursuant to, this Article VIII shall, unless otherwise provided when authorized
or ratified, continue as to a person who has ceased to be a director or officer
and shall inure to the benefit of the heirs, executors and administrators of
such a person.
Section 11. Limitation on Indemnification. Notwithstanding anything
contained in this Article VIII to the contrary, except for proceedings to
enforce rights to indemnification (which shall be governed by Section 5 of this
Article VIII), the Corporation shall not be obligated to indemnify any director
or officer in connection with
<PAGE> 17
a proceeding (or part thereof) initiated by such person unless such proceeding
(or part thereof) was authorized or consented to by the Board of Directors of
the Corporation.
Section 12. Indemnification of Employees and Agents. The Corporation
may, to the extent authorized from time to time by the Board of Directors,
provide rights to indemnification and to the advancement of expenses to
employees and agents of the Corporation similar to those conferred in this
Article VIII to directors and officers of the Corporation.
ARTICLE IX
AMENDMENTS
Section 1. Amendments. Except as otherwise provided in the Certificate
of Incorporation, these By-Laws may be altered, amended or repealed, in whole
or in part, or new By-Laws may be adopted by the stockholders or by the Board
of Directors, provided, however, that notice of such alteration, amendment,
repeal or adoption of new By-Laws shall be contained in the notice of such
meeting of stockholders or Board of Directors as the case may be. Except as
otherwise provided in the Certificate of Incorporation, all such amendments
must be approved by either the holders of a majority of the outstanding capital
stock entitled to vote thereon or by a majority of the entire Board of
Directors then in office.
Section 2. Entire Board of Directors. As used in this Article IX and
in these By-Laws generally, the term "entire Board of Directors" means the
total number of directors which the Corporation would have if there were no
vacancies.
<PAGE> 1
EXHIBIT 10.32
AMENDMENT NO. 5 TO LOAN AND SECURITY AGREEMENT
SOLO SERVE CORPORATION
1610 Cornerway Boulevard
San Antonio, Texas 78219
March 31, 1997
Congress Financial Corporation (Southwest)
1201 Main Street
Dallas, Texas 75250
Gentlemen:
Congress Financial Corporation (Southwest) ("Lender") and Solo Serve
Corporation ("Borrower") have entered into certain financing arrangements
pursuant to the Loan and Security Agreement, dated June 20, 1995, between
Lender and Borrower, as amended by Amendment No. 1 to Loan and Security
Agreement, dated October 27, 1995, Amendment No. 2 to Loan and Security
Agreement, dated January 31, 1996, Amendment No. 3 to Loan and Security
Agreement, dated June 26, 1996 and Amendment No. 4 to Loan and Security
Agreement, dated September 16, 1996 (and as amended hereby and as the same may
hereafter be amended, modified, supplemented, extended, renewed, restated or
replaced, the "Loan Agreement", together with all agreements, documents and
instruments at any time executed and/or delivered in connection therewith or
related thereto, collectively, the "Financing Agreements").
Borrower has requested that Lender agree to certain amendments to the
Loan Agreement, and Lender is willing to agree to such amendments, subject to
the terms and conditions contained herein. By this Amendment, Lender and
Borrower desire and intend to evidence such amendments.
In consideration of the foregoing and the agreements and covenants
contained herein, the parties hereto agree as follows:
1. Definitions.
(a) Additional Definition. As used herein, the following term shall
mean, and the Loan Agreement is hereby amended to include, in addition and not
in limitation, the following:
"Net Recovery Cost Percentage" shall mean the fraction,
expressed as a percentage, (a) the numerator of which is the amount equal to
the recovery on the aggregate amount of Inventory at such time on a "going out
of business" basis as set forth in the most recent
<PAGE> 2
acceptable appraisal of Inventory received by Lender in accordance with Section
7.3, net of operating expenses, liquidation expenses and commissions, and (b)
the denominator of which is the original Value of the aggregate amount of the
Inventory subject to such appraisal."
(b) Interpretation. All capitalized terms used herein shall have
the meanings assigned thereto in the Loan Agreement, unless otherwise defined
herein.
2. Loans. Section 2.1(a) of the Loan Agreement is hereby deleted in
its entirety and replaced with the following:
"(a) Subject to, and upon the terms and conditions contained
herein, Lender agrees to make Revolving Loans to Borrower from time to time in
amounts requested by Borrower up to the amount equal to:
(i) the least of the following: (A) for the period from and
including March 1 through and including May 15 and for the period from and
including September 1 through and including November 30 of each year, sixty
percent (60%) of the Value of Eligible Inventory and, at all other times,
fifty-five percent (55%) of the Value of Eligible Inventory; or (B) the amount
equal to (1) the percentage equal to eighty (80%) percent of the Net Recovery
Cost Percentage, multiplied by (2) the Value of Eligible Inventory; or (C) the
Maximum Credit; less
(ii) the sum of: (A) for the period from and including March 1
through and including May 15 and for the period from and including September 1
through and including November 30 of each year, forty percent (40%) of the then
undrawn amounts of Letter of Credit Accommodations issued for the purpose of
purchasing Eligible Inventory and, at all other times, forty-five percent (45%)
of the then undrawn amounts of Letter of Credit Accommodations issued for the
purpose of purchasing Eligible Inventory, plus (B) one hundred percent (100%)
of the face amount of the outstanding Letter of Credit Accommodations issued
for any purpose other than as set forth in Section 2.1(a)(ii)(A) above; less
(iii) the amount equal to all Obligations outstanding at any
time and from time to time (other than Obligations otherwise set forth in
Section 2.1(a)(ii) hereof); less
(iv) any Availability Reserves."
3. Letter of Credit Accommodations. Section 2.2(c) of the Loan
Agreement is hereby deleted in its entirety and replaced with the following:
"(c) No Letter of Credit Accommodations shall be available unless
on the date of the proposed issuance of any Letter of Credit Accommodations,
the Revolving Loans available to Borrower (subject to the Maximum Credit, any
Availability Reserves and any other limitations imposed by Section 2.1 hereof)
are equal to or greater than: (i) if the proposed Letter of Credit
Accommodation is for the purpose of purchasing Eligible Inventory, the sum of,
for the period from and including March 1 through and including May 15 and for
the period from and including
<PAGE> 3
September 1 through and including November 30 of each year, forty percent (40%)
and, at all other times, forty-five percent (45%) of the sum of (1) the cost of
such Eligible Inventory plus (2) freight, taxes, duty and other amounts which
Lender estimates must be paid in connection with such Inventory upon arrival
and for delivery to one of Borrower's locations for Eligible Inventory within
the United States of America, and (ii) if the proposed Letter of Credit
Accommodation is for any other purpose, an amount equal to one hundred (100%)
percent of the face amount thereof and all other commitments and obligations
made or incurred by Lender with respect thereto. Effective on the issuance of
each Letter of Credit Accommodation, the amount of Revolving Loans which might
otherwise be available to Borrower shall be reduced by the applicable amount
set forth in Section 2.2(c)(i) or Section 2.2(c)(ii)."
4. Adjusted Net Worth. Section 9.15 of the Loan Agreement is hereby
deleted in its entirety and replaced with the following:
"9.15 Adjusted Net Worth. Borrower shall at all times maintain
Adjusted Net Worth of not less than $3,750,000."
5. Representations, Warranties and Covenants. In addition to the
continuing representations, warranties and covenants heretofore or hereafter
made by Borrower to Lender pursuant to the Financing Agreements, Borrower
hereby represents, warrants and covenants with and to Lender as follows (which
representations, warranties and covenants are continuing and shall survive the
execution and delivery hereof and shall be incorporated into and made a part of
the Financing Agreements):
(a) No Event of Default exists on the date of this Amendment (after
giving effect to the amendment to the Loan Agreement made by this Amendment).
(b) This Amendment has been duly executed and delivered by Borrower
and is in full force and effect as of the date hereof, and the agreements and
obligations of Borrower contained herein constitute legal, valid and binding
obligations of Borrower enforceable against Borrower in accordance with their
respective terms.
6. Conditions Precedent. The effectiveness of the amendments contained
herein shall be subject to the satisfaction of the following conditions
precedent in a manner satisfactory to Lender and its counsel:
(a) the receipt by Lender of an original of this Amendment, duly
authorized, executed and delivered by Borrower;
(b) no Event of Default shall have occurred and be continuing and
no event shall have occurred or condition be existing and continuing which,
with notice or passage of time or both, would constitute an Event of Default;
7. Facility Fee. Borrower shall pay to Lender, in addition to all
other amounts payable under the Financing Agreements, an annual facility fee in
an amount equal to $10,000
<PAGE> 4
while the Loan Agreement is in effect and for so long thereafter as any
Obligations are outstanding, which fee shall be fully earned as of and payable
in advance commencing with the date hereof and, thereafter, on March 1 of each
year. When so earned and payable, such facility fee shall constitute part of
the Obligations and may, at Lender's option, be charged directly to any
account(s) of the Borrower maintained with Lender.
8. Effect of this Amendment. Except as modified pursuant hereto, no
other changes or modifications to the Financing Agreements are intended or
implied and in all other respects the Financing Agreements are hereby
specifically ratified, restated and confirmed by all parties hereto as of the
effective date hereof. To the extent of conflict between the terms of this
Amendment and the other Financing Agreements, the terms of this Amendment shall
control. The Loan Agreement and this Amendment shall be read and construed as
one agreement.
9. Further Assurances. The parties hereto shall execute and deliver
such additional documents and take such additional action as may be necessary
or desirable to effectuate the provisions and purposes of this Amendment.
10. Governing Law. The rights and obligations hereunder of each of the
parties hereto shall be governed by and interpreted and determined in
accordance with the laws of the State of Texas (without giving effect to
principles of conflicts of law).
11. Binding Effect. This Amendment shall be binding upon and inure to
the benefit of each of the parties hereto and their respective successors and
assigns.
12. Counterparts. This Amendment may be executed in any number of
counterparts, but all of such counterparts shall together constitute but one
and the same agreement. In making proof of this Amendment, it shall not be
necessary to produce or account for more than one counterpart thereof signed by
each of the parties hereto.
Please sign the enclosed counterpart of this Amendment in the space
provided below, whereupon this Amendment, as so accepted by Lender, shall
become a binding agreement between Borrower and Lender.
Very truly yours,
SOLO SERVE CORPORATION
By: /s/ Ross E. Bacon
-----------------------------------
Title: Chief Operating Officer and
Chief Financial Officer
<PAGE> 5
AGREED:
CONGRESS FINANCIAL CORPORATION
(SOUTHWEST)
By: /s/ Edward Franco
-----------------------------------
Title: Senior Vice President
Acknowledged and Consented to (and also acknowledging and consenting to
Amendment No. 4 to Loan and Security Agreement, dated September 16, 1996):
GENERAL ATLANTIC CORPORATION
By /s/ Julie Lefkowitz
-----------------------------------
Title: Vice President
<PAGE> 1
EXHIBIT 10.33
March 28, 1997
MetLife Capital Corporation
10900 N.E. 4th Street, Suite 500
Bellevue, Washington 98009
Attn: John Konchak, Senior Credit Analyst
Re: Loan and Security Agreement between MetLife Capital
Corporation ("MetLife") and Solo Serve Corporation
("Solo Serve"); as amended on July 18, 1995 (the "Loan
Agreement")
Dear John:
Pursuant to our letter agreement of January 23, 1996, this letter
shall serve as formal notice that Congress Financial Corporation and Solo Serve
Corporation are planning on amending Solo Serve's existing credit facility with
Congress Financial Corporation to reduce the minimum "Adjusted Net Worth"
covenant contained in the documents governing said facility to the amount of
$3,750,000.00.
Congress Financial Corporation has also agreed to amend Solo Serve's
working capital requirement. Under the credit facility as amended, Solo Serve
must now maintain working capital of not less than $4,500,000 at all times
after September 1, 1996.
When reviewing our files, we noticed that when Solo Serve and MetLife
amended Section 5(n)2 of the Loan Agreement, we did not amend Section 5(n)1
(MetLife's working capital requirement) of the Loan Agreement, therefore we
hereby request that Section 5(n)1 of the Loan Agreement be amended effective
September 1, 1996 to read as follows:
"Section 5(n)1. Working Capital: Borrower must maintain Working
Capital as defined in Borrower's Credit Facility with Congress
Financial Corporation, at the level required under said facility, as
it must be amended from time to time.
Solo Serve will notify MetLife in writing prior to any and all future
amendments. In the event that Solo Serve's credit facility with
Congress Financial Corporation should terminate, for whatever reason,
Section 5(n)1 shall return to the original definition in the Amended
Loan and Security Agreement dated July 18, 1995."
<PAGE> 2
If this proposal is acceptable to you, please execute where indicated
below and return at your earliest convenience.
Should you have any questions, please contact the undersigned.
SOLO SERVE CORPORATION
By: /s/ Ross E. Bacon
-----------------------------------
Ross E. Bacon,
Chief Financial Officer
AGREED:
METLIFE CAPITAL CORPORATION
By: /s/ John F. Konchak
--------------------------------------
John F. Konchak, Senior Credit Analyst
<PAGE> 1
EXHIBIT 10.34
SOLO SERVE CORPORATION
1610 Cornerway Boulevard
San Antonio, Texas 78219
July 8, 1996
Ross E. Bacon
2279 Encino Loop
San Antonio, TX 78247
Re: Confirmation of Offer of Employment
Dear Ross:
Confirming our conversation, listed below are what you accepted and agreed
to as conditions of your employment with Solo Serve Corporation.
You will be employed in the capacity of Vice president and Chief Financial
Officer, reporting to David Dash, President and Chief Executive Officer. You
will be responsible for all Accounting and Financial functions, Management
Information Systems, Insurance Contracts and Services, and other duties as
assigned by the President.
Your salary will be paid during the time you are actively employed with
the Company at the rate of ninety thousand dollars ($90,000) per year. Salary
is currently paid semi-monthly on the 15th and last day of the month.
You will receive a grant of twenty thousand (20,000) shares on the day you
commence employment which will be fully vested and exercisable one year from
the date of hire. The shares will be fully vested sooner if there is a change
in the ownership control of Solo Serve. Options will be priced in accordance
with the terms of the Option Plan.
If your employment is terminated by the Company for any reason other than
"for cause," as defined in attachment A, you will receive severance pay as
follows: Three (3) months base salary as severance pay if termination
occurred in the first six (6) months; and six (6) months base salary as
severance pay if your employment is terminated after six (6) months from the
date of hire. The severance pay would be payable on the 15th and last day of
the month for the qualifying period of time. Should you find employment prior
to the severance payments expiring, and your salary is less than your salary at
Solo Serve, then the amount of severance payments due would be reduced by the
amount of your
<PAGE> 2
Ross E. Bacon
July 8, 1996
Page 2
earnings. If your salary is greater than your salary at Solo Serve, there
would be no further severance payments due.
You will be entitled to receive a one week paid vacation at an agreed time
prior to December 31, 1996, and two weeks paid vacation after December 31,
1996. You will be eligible for long-term disability, medical/life, and dental
upon your date of hire. Other benefits include free travel/accident insurance,
associate discount, paid Company and personal holidays, and the executive sick
pay plan. You are eligible to participate in the 401(k) Retirement Savings
Plan after one year of service on the earliest enrollment date permitted by the
Plan.
All associates are employed "At-Will," and either Solo Serve Corporation
or yourself is free to terminate the employment relationship at any time, with
or without notice, and with or without reason. This letter is not intended to
be an employment contract for any definite period of time, but rather to
confirm an understanding as to the terms and conditions of your employment.
Ross, if the above is your understanding of the conversation, please
indicate so by signing below and returning the original to me.
Sincerely,
/s/ Jim Miranda
- ---------------------------
Jim Miranda,
Director of Human Resources
/s/ Ross E. Bacon
- --------------------------- ---------------------------------
Date Ross E. Bacon
<PAGE> 3
ATTACHMENT A
July 8, 1996
RE: Offer of Employment to Ross E. Bacon
Termination "for cause"
"Cause" shall mean the occurrence of any one or more of the following events:
1. The employee has engaged in willful misconduct, including embezzlement,
fraud, or malfeasance in the performance of his duties as prescribed from time
to time by the President of the Company;
2. The employee has breached a policy or procedure of the Company which is
generally applicable to officers of the Company, which breach is material and
continues for a period of 30 days after being given notice of such breach by
the Company.
3. The employee has failed to perform his duties as prescribed and amended from
time to time by the President which failure continues for a period of 30 days
after being given notice of such breach by the Company.
4. The employee has been charged by a governmental agency or department with
any violation of law, regulation or ordinance of a governmental entity (other
than traffic violations and similar minor offenses) or has violated any
judicial decree applicable to the Company or the employee;
5. The employee has materially breached any written agreement between employee
and the Company which breach continues for a period of 30 days after being
given notice of such breach by the Company; or
6. The employee's representations and warranties prove to be materially false
in any manner.
<PAGE> 1
EXHIBIT 10.35
AMENDMENT NO. 6 TO LOAN AND SECURITY AGREEMENT
SOLO SERVE CORPORATION
1610 Cornerway Boulevard
San Antonio, Texas 78219
May 19, 1997
Congress Financial Corporation (Southwest)
1201 Main Street
Dallas, Texas 75250
Gentlemen:
Congress Financial Corporation (Southwest) ("Lender") and Solo Serve
Corporation ("Borrower") have entered into certain financing arrangements
pursuant to the Loan and Security Agreement, dated June 20, 1995, between
Lender and Borrower, as amended by Amendment No. 1 to Loan and Security
Agreement, dated October 27, 1995, Amendment No. 2 to Loan and Security
Agreement, dated January 31, 1996, Amendment No. 3 to Loan and Security
Agreement, dated June 26, 1996, Amendment No. 4 to Loan and Security Agreement,
dated September 16, 1996 and Amendment No. 5 to Loan and Security Agreement,
dated March 31, 1997 (and as amended hereby and as the same may hereafter be
amended, modified, supplemented, extended, renewed, restated or replaced, the
"Loan Agreement", together with all agreements, documents and instruments at
any time executed and/or delivered in connection therewith or related thereto,
collectively, the "Financing Agreements").
Borrower has requested that Lender agree to certain amendments to the Loan
Agreement, and Lender is willing to agree to such amendments, subject to the
terms and conditions contained herein. By this Amendment, Lender and Borrower
desire and intend to evidence such amendments.
In consideration of the foregoing and the agreements and covenants
contained herein, the parties hereto agree as follows:
1. Interpretation. All capitalized terms used herein shall have the
meanings assigned thereto in the Loan Agreement, unless otherwise defined
herein.
2. Renewal Term. All References to the term "Renewal Rate" in the Loan
Agreement shall be deemed, and each such reference is hereby amended, to mean
July 31, 1999.
<PAGE> 2
Congress Financial Corporation (Southwest)
May 19, 1997
Page 2
3. Working Capital. Section 9.14 of the Loan Agreement is hereby deleted
in its entirety and replaced with the following:
"9.14 Working Capital. Borrower shall at all times on and after March
1, 1997 maintain Working Capital of not less than $3,250,000."
4. Adjusted Net Worth. Section 9.15 of the Loan Agreement is hereby
deleted in its entirety and replaced with the following:
"9.15 Adjusted Net Worth. Borrower shall at all times on and after
March 1, 1997 maintain Adjusted Net Worth of not less than $800,000."
5. Representations, Warranties and Covenants. In addition to the
continuing representations, warranties and covenants heretofore or hereafter
made by Borrower to Lender pursuant to the Financing Agreements, Borrower
hereby represents, warrants and covenants with and to Lender as follows (which
representations, warranties and covenants are continuing and shall survive the
execution and delivery hereof and shall be incorporated into and made a part of
the Financing Agreements):
(a) No Event of Default exists on the date of this Amendment (after
giving effect to the amendment to the Loan Agreement made by this Amendment).
(b) This Amendment has been duly executed and delivered by Borrower
and is in full force and effect as of the date hereof, and the agreements and
obligations of Borrower contained herein constitute legal, valid and binding
obligations of Borrower enforceable against Borrower in accordance with their
respective terms.
6. Conditions Precedent. The effectiveness of the amendments contained
herein shall be subject to the satisfaction of the following conditions
precedent in a manner satisfactory to Lender and its counsel:
<PAGE> 3
Congress Financial Corporation (Southwest)
May 19, 1997
Page 3
(a) The receipt by Lender of an original of this Amendment, duly
authorized, executed and delivered by Borrower.
(b) No Event of Default shall have occurred and be continuing and no
event shall have occurred or condition be existing and continuing which, with
notice or passage of time or both, would constitute an Event of Default (after
giving effect to the amendment to the Loan Agreement made by this Amendment).
7. Effect of this Amendment. Except as modified pursuant hereto, no
other changes or modifications to the Financing Agreements are intended or
implied and in all other respects the Financing Agreements are hereby
specifically ratified, restated and confirmed by all parties hereto as of the
effective date hereof. To the extent of conflict between the terms of this
Amendment and the other Financing Agreements, the terms of this Amendment shall
control. The Loan Agreement and this Amendment shall be read and construed as
one agreement.
8. No Waiver. Lender has not waived and is not by this Amendment
waiving, and has no intention of waiving any Event of Default which may have
occurred on or prior to the date hereof or may be continuing on the date hereof
or may occur after the date hereof, and Lender reserves the right, in its
discretion, to exercise any or all of its rights and remedies arising under the
terms of the Financing Agreements as a result of any such other Event of
Default which may have occurred on or prior to the date hereof or may be
continuing on the date hereof or may occur after the date hereof.
9. Further Assurances. The parties hereto shall execute and deliver such
additional documents and take such additional action as may be necessary or
desirable to effectuate the provisions and purposes of this Amendment.
10. Governing Law. The rights and obligations hereunder of each of the
parties hereto shall be governed by and interpreted and determined in
accordance with the laws of the State of Texas (without giving effect to
principles of conflicts of law).
<PAGE> 4
Congress Financial Corporation (Southwest)
May 19, 1997
Page 4
11. Binding Effect. This Amendment shall be binding upon and inure to the
benefit of each of the parties hereto and their respective successors and
assigns.
12. Counterparts. This Amendment may be executed in any number of
counterparts, but all of such counterparts shall together constitute but one
and the same agreement. In making proof of this Amendment, it shall not be
necessary to produce or account for more than one counterpart thereof signed by
each of the parties hereto.
Please sign the enclosed counterpart of this Agreement in the space
provided below, whereupon this Amendment, as so accepted by Lender, shall
become a binding agreement between Borrower and Lender.
Very truly yours,
SOLO SERVE CORPORATION
By: /s/ Ross E. Bacon
--------------------------------
Title: Executive Vice President
AGREED:
CONGRESS FINANCIAL CORPORATION
(SOUTHWEST)
By:/s/ Edward Franco
--------------------------------
Title: Senior Vice President
ACKNOWLEDGED AND CONSENTED TO BY:
GENERAL ATLANTIC CORPORATION
By: /s/ Julie Leftkowitz
--------------------------------
Title: Vice President
<PAGE> 1
EXHIBIT 21.1
Subsidiaries of the Registrant
None.
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We hereby consent to the incorporation by reference in each of the Registration
Statements of Solo Serve Corporation on Forms S-8 (Nos. 33-99000 and 33-99670)
filed on November 20, 1995, of our report dated May 14, 1997 appearing on Page
F-1 of this Annual Report on Form 10-K. We also consent to the incorporation of
our report on the Financial Statement Schedule, which appears on page S-1 of
this Form 10-K.
PRICE WATERHOUSE LLP
San Antonio, Texas
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF THE REGISTRANT SET FORTH IN THE REGISTRANT'S ANNUAL
REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED 02-1-97 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH REPORT.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> FEB-01-1997
<PERIOD-END> FEB-01-1997
<CASH> 1,065,564
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 11,107,938
<CURRENT-ASSETS> 13,161,971
<PP&E> 12,935,322
<DEPRECIATION> 0
<TOTAL-ASSETS> 26,387,293
<CURRENT-LIABILITIES> 7,094,115
<BONDS> 14,960,600
0
13,889
<COMMON> 28,562
<OTHER-SE> 4,290,127
<TOTAL-LIABILITY-AND-EQUITY> 26,387,293
<SALES> 95,237,689
<TOTAL-REVENUES> 95,237,689
<CGS> 67,484,703
<TOTAL-COSTS> 67,484,703
<OTHER-EXPENSES> 31,613,213
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,624,320
<INCOME-PRETAX> (5,484,547)
<INCOME-TAX> 0
<INCOME-CONTINUING> (5,484,547)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,484,547)
<EPS-PRIMARY> (1.92)
<EPS-DILUTED> (1.92)
</TABLE>
